Abstract
Purpose: The purpose of this paper is to investigate the effect of the financial crisis on the management of risk in the largest US banks. Design/Methodology/Approach: Levels of risk exposure, risk consequences and risk management were examined using a content analysis of the 10-K annual reports form of a sample of 59 largest U.S. banks. Paired-t-test, along with frequency analysis of the disclosures of 15 banking risks was used to test our research hypotheses. Findings: We found that the subprime financial crisis had significantly affected the levels of risk exposure and its consequences after the crisis (risks more probable and certain with major consequences). We also found minor but significant changes in the ERM strategies after the crisis for the three major categories of risk investigated in this study (financial, business, strategic). We found that the changes in ERM strategies were not significant for risks examined individually with the exception of credit risk. Finally, the number of banks disclosing their levels of ERM increased after the crisis especially for systemic risk. Practical implications: Our study is particularly relevant for standards setters and regulatory bodies for it sheds light on the vulnerability of banks to certain types of risks (such as systemic risk) and helps them orient their analysis and find comprehensive and innovative solutions for future reform. Originality/Value: This research enriches the literature on ERM disclosures and presents the first study examining the effect of the crisis on ERM levels in the US banking sector.
Highlights
The bank is at the heart of the financial system and plays a crucial role in the injection of liquidity into the market
These studies have shown a weak strategy of risk disclosure adopted by Canadian and US companies concerning the level of Enterprise Risk Management (ERM) before and after the crisis. These studies were mainly concentrated on companies from the non-financial sector. To fill this gap and providing the crisis originated from the US financial sector, our study investigates the effect of the crisis on the levels of ERM disclosure in the annual reports of the largest US banks
The financial crisis has a significant impact on the ERM strategy of the largest US banks
Summary
The bank is at the heart of the financial system and plays a crucial role in the injection of liquidity into the market. A number of recent scholarly articles have addressed the topic from different perspectives, very few have focused on the effect of the crisis on the ERM components themselves, namely risk exposure, consequences and management strategy, in the banking sector during the financial crisis. Maingot et al [10] investigated the effect of the crisis on risk management disclosures by non-financial Canadian companies listed on the S&P TSX composite index using a content analysis of the annual reports for the years 2007/2008 According to their findings, very few changes have been registered regarding the assessment of risk exposure, consequences and ERM strategies. Maingot et al [11] analyzed the effect of the crisis on ERM disclosures by Canadian companies from the financial sector They found very few changes in the disclosure of the level of risk exposure, consequences and management which confirmed the results of the prior study. To fill this gap and providing the crisis originated from the US financial sector, our study investigates the effect of the crisis on the levels of ERM disclosure in the annual reports of the largest US banks
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