The determinants of risk disclosure by banking institutions

Abstract

Purpose The purpose of this paper is to investigate the extent of risk disclosure and the factors determining this for all listed banks in Bangladesh. Design/methodology/approach Relying on a theoretical framework based on agency theory and the creation of a risk disclosure index (RDI) based on International Financial Reporting Standard (IFRS) 7, Basel II: market discipline, and prior literature, hand-collected data from the annual reports of all 30 banks traded on the Dhaka Stock Exchange over 2007-2012, creating 180 bank-year observations, are analysed. Findings The study suggests that implementation of IFRS 7 and Basel II: market discipline standards in a non-mandated environment raised the extent of risk disclosure in every category of financial institution risk (market, credit, liquidity, operational and equities). The effect can be attributed to regulatory concerns and voluntary adoption of international disclosure standards in the banking industry in Bangladesh. Specifically, whilst the determinants of disclosure vary across types of risk, the number of risk committees, leverage, company size, the existence of a risk management unit, board size and a Big4 affiliate auditor are significant determinants of at least one category of risk disclosure. Research limitations/implications The source of risk disclosures is limited to listed banks’ annual reports. Practical implications The RDI, developed in this paper, contributes to the literature by: first, quantifying the extent of each of five types of risk disclosure; and second, identifying the factors determining them. Stakeholders, particularly depositors and investors, can use this index to select or monitor their bank of interest. Originality/value The RDI was developed according to the most relevant standards – IFRS 7 and Basel II: market discipline, plus prior scholarly literature. This type of benchmarking has not been conducted to date in previous studies. Inferences about risk disclosure are based on archival data derived from all listed banks in a virtually unregulated environment. Further, the study complements the literature by providing support for the applicability of agency theory in investigating the level of risk disclosure by banks.