Impact of underwriting insurance risk on bank holding company behavior

Purpose This paper aims to study differences in risk behavior between holding companies that undertake both banking activity and insurance underwriting (labeled financial holding companies or FHCs) and stand-alone bank holding companies (BHCs). Design/methodology/approach The paper examines the discretionary accruals of FHCs to comparable BHCs and compares their bad loans-to-assets ratio in the future. Findings FHCs have lower discretionary accruals (loan loss provisions and realized capital gains) than BHCs. FHCs fare better than BHCs in terms of bad loans-to-assets ratio. Insurance underwriting has a dampening effect on discretionary accruals of FHCs. Research limitations/implications This study raises additional research questions. Do shared governance and insurance underwriting serve as substitutes or complements? Will regulatory environment affect this relation? Practical implications When reported earnings do not match true earnings, the market participants lose the ability to price correctly, and the regulators lose the ability to effectively regulate banks. From the regulatory perspective, these findings suggest insurance underwriting by banks mitigate potential market distortions. Originality/value This paper is the first to study the effect of underwriting insurance risk on earnings management behavior of BHCs and its link to risk governance.