Risk management by US and Canadian financial firms during the financial crisis

Abstract

The objectives are to examine the impact of the 2008 financial crisis on enterprise risk management (ERM) disclosures in US and Canadian financial firms, and to compare risk management between these two financial sectors. ERM disclosures were examined through a content analysis of the 2007 and 2008 annual reports. The number of risk disclosures increased only slightly from 2007 to 2008. When the levels of risk exposure, risk consequences and risk management were examined, the only change was the reporting of higher risk consequences from 2007 to 2008 by US companies. Canadian companies reported higher levels of risk exposure and risk consequences only for liquidity risk. While there were similarities in the disclosure of risks in the financial category, the US financial sector firms disclosed higher levels of risk exposure but managed these risks more passively, whereas the Canadian firms reported higher levels of risk consequences and managed these risks more actively. Firms in the financial sector have not been inclined to disclose more information about their risk management strategies, despite the importance of risk management in their business model. This information asymmetry has potential for significant costs to investors and society in general. A study comparing the US and Canadian financial sectors has not been done previously. Given the origins of the financial crisis in the US and the relatively stable Canadian financial sector, this study is overdue.