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Overconfident Bank CEOs: Risk Amplification Amid Economic Uncertainty

Author

Listed:
  • Kwabena Aboah Addo

    (Utrecht University)

  • Shams Pathan

    (University of Newcastle - Newcastle University Business School)

  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

Abstract

We examine whether overconfident bank CEOs mitigate or amplify risk amid increasing Economic Policy Uncertainty (EPU). Our findings indicate the latter—a risk-aggressive behavioural response to the rise in credit demand during EPU. Cross-sectional analyses reveal that overconfident CEOs contribute to high loan impairments during high EPU through excessive credit extension and under-provision of loan reserves. Therefore, we identify overconfident CEOs as a transmission channel that propagates a cycle of risky credit extension, which enhances bank performance. Considering our findings, investors, boards, and regulators, while acknowledging the value of overconfident CEOs during EPU, should be mindful of the systemic implications of their policies.

Suggested Citation

  • Kwabena Aboah Addo & Shams Pathan & Steven Ongena, 2024. "Overconfident Bank CEOs: Risk Amplification Amid Economic Uncertainty," Swiss Finance Institute Research Paper Series 24-31, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2431
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    More about this item

    Keywords

    Economic Policy Uncertainty; CEO overconfidence; banking risk; bank lending; banking performance.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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