N°24-31: Overconfident Bank CEOs: Risk Amplification Amid Economic Uncertainty

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.