Do Risk Disclosures Matter for Bank Performance? A Moderating Effect of Risk Committee

Abstract

This study examines whether risk disclosure and risk committee are associated with major banks’ performance worldwide. We also test whether the composition of a risk committee moderates (i.e. strengthens or weakens) this relationship. Using 1760 bank-year observations of 160 banks across 45 countries for the years 2006–2016, we find that risk disclosure and risk committees are associated with a bank’s overall performance. In addition, the findings suggest that the composition of a risk committee moderates the relationship between risk disclosure and bank performance. The results support the contention that risk disclosure and risk committee can be used as a channel to optimise the performance of a bank. Conclusions reflect on how the agency, signalling, and resource-based theories inform this phenomenon. This paper advances our understanding of the role of risk committee characteristics on the relationship between risk disclosures and bank performance from both theoretical and empirical perspectives, suggesting risk committee is not a panacea for risk monitoring. However, the existence of a strong risk committee is vital for effective risk governance. Findings from this research may have valuable practical and policy implications, particularly in the banking sector.

Keywords:

• corporate governance
• risk disclosure
• risk committee
• performance

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Goddard et al. (2009, p. 363) report ‘an estimation of $2.7tn (trillion) for write-downs of the US – originated assets by banks and other finance institutions between 2007 and 2010 and the estimated write-downs for all mature market-originated assets for the same period is in the region of $4tn (trillion).’

2 Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB).

3 The National Commission on the Causes of the Financial and Economic Crises in the US (2011, p. xvii) concluded that ‘dramatic failures of corporate governance … .at many systematically important finance institutions were a key cause of financial crises.’

4 For instance, Beasley et al. (2005) and Pagach and Warr (2010) argue that risk management is not value relevant and these studies found no significant market response on employing a chief risk officer (CRO). Further, McShane et al. (2011) found no additional growth in firm value in US insurance companies after enterprise risk management policies were introduced. Botosan (1997) contended that more disclosure creates opportunities for manufacturing firms by decreasing the cost of capital. Verrecchia (2001) found evidence that more disclosure benefits the organisation through high market liquidity. Baumann and Nier (2004) contended that increased disclosure had consequences for decreased bank stock price volatility. In contrast, Lin et al. (2012) discovered a negative association between enterprise risk management and firm performance on property and insurance industry.

5 For example, both the USA. and Canada require disclosure of market risk, including forward-looking information (FRR 48). However, in Canada, the disclosure of an additional 21 qualitative types of information is voluntary and is guided by the Ontario Securities Commission (Dobler et al., 2011).

6 RD scores above the median are measured as high-risk disclosure groups, and those below the median are measured as low disclosure group.