Risk Governance and Control: Financial Markets and Institutions

Journal Information
ISSN / EISSN : 2077429X / 20774303
Current Publisher: Virtus Interpress (10.22495)
Total articles ≅ 445
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Risk Governance and Control: Financial Markets and Institutions; doi:10.22495/rgc

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Pasqualina Porretta, Aldo Letizia, Fabrizio Santoboni
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 29-44; doi:10.22495/rgcv10i2p3

The expected loss approach (ECL) defined by IFRS 9 replaced the old incurred loss approach (IAS 39) in the international accounting standard setter. In Europe, the IFRS 9 are accompanied by new regulatory frameworks (BCBS), opinion, technical standards (EBA) which do not always provide the same methodological and operational implications of the accounting standard setter. Many aspects of IFRS 9 have been studied, but this paper analyzes its interdependencies and overlaps with the credit risk framework for financial intermediaries (also Basel 3). Using a case study, the purpose of this paper is to investigate the ECL, its main impacts on coverage ratio of a loan’s portfolio. The main findings are: usually, the rules laid down for Stage 1 of IFRS 9 do not reduce the excess coverage produced on a portfolio in bonis; in the presence of impaired loans IAS 39 generates a lack of funds; the lifetime ECL (Stage 2 of IFRS 9) imposes excess of provisions because it does not consider the effect of coverage produced by expected premiums; for loan portfolios with short repayment times, the excess of provisions produced by IFRS 9 compensates the lack of coverage of the capital requirement. From the academic research perspective, this paper contributes to the literature on ECL model in several ways. First, it adds knowledge to the research on the relationship between Credit Risk Management framework and accounting standard IFRS 9. Second, it also links our findings related to ECL approach with potential implications for the financial sector, policymakers and regulators.
Mbako Mbo
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 21-28; doi:10.22495/rgcv10i2p2

The credit landscape in commercial private finance is fast evolving as available funds continue to chase for enhanced returns, for optimised risk acceptance. On the other hand, developing countries, and economies in transition continue to grapple with factors such as public debt, widening fiscal gaps often exacerbated by persistent budget deficits. As a result, governments prioritise provisioning of critical public goods, which then leaves a gap in the financing of less urgent, yet developmentally important investments. This gap is often left to state-owned Development Finance Institutions, or DFIs to fill (UNCTAD, 2019), yet success for these institutions has been generally dismissed (Xu, Ren, & Wu, 2019). This paper appraises the continuing importance of DFIs and analyses factors that drive their sustainability, with the state ownership dynamic in mind. A secondary research approach is taken, predominantly applying the document analysis method, i.e., extant literature from reputable sources on the subjects of state-owned enterprises, development finance, profitability of financial institutions, and firm financial structure. The paper concludes that DFIs are still relevant, and that the type and cost of carefully blended capital available to them is a fundamental determinant of effectiveness in the context of the two-pronged objectives SOEs are known to have. A practical framework by which this can be achieved is proposed.
Dimitra Loukia Kolia, Simeon Papadopoulos
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 8-20; doi:10.22495/rgcv10i2p1

In this paper, we investigate the relationship among capital, risk and efficiency in Eurozone and the U.S. banking institutions. We also assess the determinants of bank capital, risk and efficiency providing evidence of how the interrelationship and the managerial behaviors vary per type of bank (retail, commercial and investment banks). Concerning the methodology, we employ the input-oriented CCR model of data envelopment analysis developed by Charnes, Cooper, and Rhodes (1978) to estimate efficiency. We also apply the Z-score to calculate bank risk and the ratio of the value of total equity to total assets as an indicator of bank capital. Moreover, the relationship among capital, risk and efficiency of banking institutions is investigated by employing the three-stage least squares (3SLS) model, developed by Zellner and Theil (1962). Our main findings indicate that risk and capital are positively linked in the U.S. and Eurozone banks. The findings also suggest that efficiency has a negative and significant effect on bank risk in the majority of the banks of our sample. Additionally, we may conclude that the impact of risk and capital on efficiency levels is sensitive to the type of bank. As regards the effect of the variable efficiency on capital, the results are negative for all the banks in our sample.
Stefano Dell’Atti
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 4-6; doi:10.22495/rgcv10i1_editorial

The first issue of the journal in 2020 (volume 10, issue 1) provides a careful analysis of the important field of research regarding the social indicators, the corporate governance system, risk analysis and risk management, disclosure and bank regulation. Specifically, the current issue pays attention of an index to measure the quality of the most important European cities, the evolution of Saudi Arabia corporate governance systems, the econometric approach to estimate the influence of interest rates and inflation rates on default rates of banks, the Canadian companies and risks firms disclose, the relevance of enterprise risk management (ERM) information disclosure in the US banking sector and the bank regulation of capital and risk management in the Europe and Central Asia region.
Deniz Anginer, Asli Demirgüç-Kunt, Davide Salvatore Mare
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 75-93; doi:10.22495/rgcv10i1p6

This paper examines changes in bank capital and capital regulations since the global financial crisis, in the Europe and Central Asia region. It shows that banks in Europe and Central Asia are better capitalized, as measured by regulatory capital ratios, than they were prior to the crisis. However, the increase in simple equity ratios for the same banks has been smaller over the past 10 years. The increases in regulatory capital ratios have coincided with a reduction in the stringency of the definition of Tier 1 capital and reduction in risk-weights. We further analyze the relationship between bank capital and bank risk using individual bank data. We show that bank risk in Europe and Central Asia is more sensitive to changes in simple leverage ratios than changes in regulatory capital ratios, consistent with the notion that equity ratios only include high-quality capital and do not rely on internal risk models to compute risk-weights. Although there has been some effort to increase capital and liquidity requirements for institutions deemed systemically important, the region has been lagging in addressing the resolution of these institutions. In line with Demirguc-Kunt, Detragiache, and Merrouche (2013), our findings show the importance of the definition of bank capital to assure bank financial stability in Europe and Central Asia.
Raef Gouiaa, Daniel Zéghal, Meriem El Aoun
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 61-74; doi:10.22495/rgcv10i1p5

The purpose of this article is to validate the quality and the relevance of enterprise risk management (ERM) information disclosure by analyzing the relation between the different dimensions of ERM disclosed in the annual report and the traditional measures of risk in the US banking sector. We use content analysis to measure ERM dimensions and a correlation analysis to document the links between risk exposure, consequences, and strategies (Aebi, Sabato, & Schimd, 2012), and the traditional measures of risk (Schnatterly, Clark, Howe, & DeVaughn, 2019) disclosed in the annual reports from 2006 to 2009. We then separately make the analysis for the period before and after the crisis to identify any effect of the crisis on ERM information’s ability to predict and reflect the banking sector’s traditional risk (Maingot, Quon, & Zéghal, 2018). Our results reveal the overall validity of ERM information in assessing traditional risk measures through a significant correlation between ERM exposure, consequences and strategies, and most of the traditional measures of risk. Finally, we confirmed the relevance and the robustness of our results through a portfolio analysis approach. This research sheds new light on the relevance of ERM information by introducing a new framework and a new methodology for assessing the validity of this information within the banking sector, where risk management plays a vital role. The results are potentially useful for banks regulators as well as for producers and users of the information on banking risks.
Michel Coulmont, Sylvie Berthelot, Caroline Talbot
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 52-60; doi:10.22495/rgcv10i1p4

In recent decades, financial and accounting regulators have turned the spotlight on risk management and disclosure. Like securities regulators in the United States, the United Kingdom and several other countries, Canadian Securities Administrators have set out requirements for the disclosure and discussion of risks in the MD&A section of annual reports. Responding positively to these new guidelines, organisations now report many risks in their MD&A. These disclosure requirements are intended to provide information about a company’s material risks to help stakeholders understand and evaluate interrelated risks, the risks’ impact and the company’s risk management strategies (Khandelwal, Kumar, Verma, & Pratap Singh, 2019). However, since the nature of the risks disclosed derives wholly from organisational decisions, the content of these disclosures can be considered voluntary. For this reason, some critics argue that risk disclosures are by and large boilerplate in nature (Bao & Datta, 2014; Hope, Hu, & Lu, 2016). From this perspective, this study aims to examine whether there is a relationship between the risks firms disclose in their annual reports and their systematic risk. The regression analyses were carried out on the risks disclosed by a sample of 200 Canadian companies included in the 2016 Toronto Stock Exchange S&P/TSX Composite Index. These analyses revealed a positive and significant relationship between the risks disclosed and the firms’ systematic risk. Our results support the regulatory approaches respecting this type of information adopted by a number of countries. Accordingly, disclosing the risks that companies face should help small investors understand and appreciate them.
Marco Ticciati
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 37-51; doi:10.22495/rgcv10i1p3

The paper quantifies the influence of interest rates and inflation rates on default rates of banks. By expanding the work of Duffee (1998), with the unspanned risks as in the work of Joslin, Priebsch, and Singleton (2014), we estimate a multifactor model with unspanned interest rates and inflation rates to test the performance of unspanned variables in the default rate term structure of banks. The model is trained in samples of positive interest rates and evaluated in samples of negative interest rates. we check the robustness of the model by comparing the results with the performance of alternative model specifications. The model reveals that unspanned variables have worse performance than alternative models specifications. The negative effect of interest rates on default rates over longer maturities may lead the EA banks to decrease the loan supply to the real economy. As a consequence EA banks will have a lower net interest margin as the return of assets is lower. This may increase the future probability of default. Thus, the solution for EA banks is on the reach to yield behavior as described by Bruno and Shin (2015). This means that EA banks have to modify the allocation of assets more in favour of riskier and longer maturity securities to obtain higher profitability.
Mamdouh Abdulaziz Saleh Al-Faryan
Risk Governance and Control: Financial Markets and Institutions, Volume 10, pp 23-36; doi:10.22495/rgcv10i1p2

In spite of growing interest in Saudi corporate governance systems, there is little literature on the evolution of Saudi corporate governance. This study helps close this gap by investigating and compiling corporate governance development in Saudi Arabia. After providing background information for Saudi Arabia and its corporate governance model, we touch on the Saudi legal system and key external institutions that helped shape its corporate governance. We examine the specific contributions of the accounting and auditing professions, and the roles of the National Anti-Corruption Commission and the Saudi Stock Exchange. We describe key reforms implemented to develop the Saudi economy and evaluate their importance in facilitating change in corporate governance practices. This study contributes as an initial point of reference for future studies on Saudi Arabia, and serves as a one stop resource for both academics and practitioners, while specifically benefitting foreign and domestic investors considering investments in Saudi Arabia.
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