Abstract
This study contributes to the existing literature on risk disclosure (RD) by measuring and analysing RD among European banks from 2007 to 2018. Therefore, the determinants and economic consequences of risk disclosure have been investigated. On the side of RD measurement, the study adopts new risk-related keywords and a modernist view. The results indicate that levels of RD are increasing over time, but different countries show various levels of RD. The factors that may positively impact such disclosures are the bank's size, size of the board of directors, and board gender diversity, and inversely affected by the profitability ratios and liquidity. From the economic consequence perspective, this study suggests that RD has a different impact on various credit ratings and sheds light on the efficiency of narrative RD. Based on the results, a higher level of risk disclosure quantity is associated with a lower cost of debt. Therefore, it can be concluded that RD is important information news by bondholders and credit agencies which in turn reduces the uncertainty in the debt market.1.1Overview
Over the past decade, there has been a significant interest in the banking stability of financial institutions (Ali & Puah, 2019; Barr et al., 1994). Banking stability is a critical ingredient of financial stability and is a yardstick when determining the strength and capability of an economy to endure both the internal and external shocks (Kočišová & Stavárek, 2018). This matter has gained considerable attention since the 2007/08 Global Financial Crisis (GFC) that resulted in the collapse of numerous investment and commercial banks (Barth & Landsman, 2010). Multiple financial crises and associated corporate scandals (e.g. Enron, Lehman Brothers) have brought to the fore the academic debate on the necessity to strengthen market efficiency through improved disclosure and transparency (Barakat & Hussainey, 2013; Tadesse, 2006). Furthermore, Flannery et al. (2013) identify a reduction in bank stability during these two crises, consistent with bank opacity in late 1998 and 2008. Also, Manganaris et al. (2017) claim that there is a high probability that the opaqueness of the banking sector played a significant role in the 2007-2008 GFC. Thus, market participants, particularly investors and policymakers, were concerned about the opaqueness of the banking sector prior to the crisis.
Bouvard et al. (2015) conclude that providing disclosure to the public will ensure investors about the financial system's stability, thus providing protection banking against aggregate shocks.
Basel Committee on Banking Supervision (BCBS) emphasised the significant role of disclosure to enhance transparency and strengthen market discipline (Helbok & Wagner, 2006). Providing risk information is likely to reduce information asymmetry and mitigate uncertainty in the banking industry (Jizi & Dixon, 2016). Also, prior studies (e.g., Jensen & Meckling, 1976; Poshakwale & Courtis, 2005) argue that the main purpose of providing information is to respond to investors’ demands, enhance transparency, and reduce agency costs.
In the banking industry, risk reporting is one of the mainstreams of disclosure (Barakat & Hussainey, 2013). The BCBS, in the Pillar 3 of the Basel II Capital Accord, emphasises the significance of informative risk disclosure in banks (Basel Committee on Banking Supervision, 2006b; Barakat & Hussainey, 2013). The Basel Committee describes the importance of risk disclosure for a market participant to comprehend the risk profile of the banking industry. Therefore, banks should assess their disclosure's appropriateness, validation, and frequency (BCBS, 2006).
The banking sector increases investors' confidence regarding the financial system by providing clear risk-related information in an easily accessible way (Oliveira et al., 2011). Grassa et al. (2020) discuss the significance of improving banks' risk reporting in order to strengthen the banking sector, as highlighted by the Financial Stability Board (2012) and PricewaterhouseCoopers (PWC) (2013). The GFC exerted considerable pressure on policymakers, standard setters, and banking regulatory organisations to evolve accounting standards to improve transparency in the banking industry (Bushman, 2014, Manganaris et al., 2017).
A major factor in the GFC was the lack of transparency of financial institutions and excessive bank borrowing (Schoen, 2016; Vauhkonen, 2012). However, Laeven & Levine (2009) and Wang et al. (2020) suggest that the lack of transparency reflected the banking sector’s stability and fundamental economic activities. There is an ongoing debate about whether bank transparency supports or undermines bank stability (Bushman, 2014; Manganaris et al., 2017).
| Date of Award | 23 Sept 2022 |
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| Original language | English |
| Awarding Institution |
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| Supervisor | Awad Ibrahim (Supervisor) & Khaled Hussainey (Supervisor) |