A well-governed bank will have processes in place to identify the optimal amount of risk and ensure that its risk stays close to this optimal amount, notes a research paper from Ohio State University.
René Stulz of Ohio State University in the research paper titled: “Governance, Risk Management, and Risk-Taking in Banks” highlights how governance and risk management affect risk-taking in banks.
Good vs bad risks
According to the paper, banks are exposed to good risks and bad risks. Good risks are risks that have an ex-ante private reward for the banks on a stand-alone basis. On the other hand, bad risks won’t have such a reward. The paper highlights that a well-governed bank will take the amount of risk that...
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