The global financial crisis
(GFC) has caused the collapse of major financial institutions worldwide that
brought a considerable attention to the connection between governance,
accountability, and performance. The interest was heightened by the global financial
crisis in the connection between the performance and governance of banks [1]. The banking sector has major
contribution in the economy of the world therefore analyzing the banking sector
and risk associated with this sector is important. Particularly, the banking
sector is important in the development of any country and play significant role
in economic development. During a financial crisis, furthermore, turbulence
lead to the credit crunch that affected the activity of banks and spread to
other sectors. Prior research regarding corporate governance has tended not to
include financial institutions from an analysis [2]. This
In large banks, the risk governance seems to have improved
only to some limited extent despite an increased regulatory pressure that the
credit crisis has induced. The banking risk governance needs to have at least
(1) a dedicated risk committee of board level, of which (2) most of the members
of the committee should be given an autonomy, and (3) the CRO should be
included in the executive board of banks. Till the years of 2007, there was
only a small number of banks to follow best practices. Even though there were
various large banks that had a dedicated risk committee, however, they used to
meet infrequently. Moreover, most of the risk committees were not comprised of
adequate financially knowledgeable and independent members, and despite having
a CRO, its reporting line and position did not ensure an appropriate
accessibility level and thus influence on the board of directors as well as on
the CEO [3].
This paper contributes to
investigating the relationships between risk-taking, risk governance and bank
performance. The authors aim to conduct the empirical analysis based on a
sample of listed, large commercial banks around the world over a ten-year
period; i.e. from 2007-2016. The dataset commences in 2007 to capture the
effect of the global financial crisis (GFC). The dataset captures the
period of GFC; its initiation, transition and post effects. The
global financial crises did not occur out of single reason.
The series of events become the reason for global financial crises. It can be
said that the risk was not mitigated or identified properly which caused the
financial crises in the first place. The banking polices the role of the top
management and the accounting standards all held responsible for the global
financial crises. At that time many banks approved huge amount of loans for the
houses which leads to banking crises. The banks did not accurately investigate
the financial condition of the borrowers which cause the crises. The banks
invested in the high risk and complex financial products and due to
the crises the value of the financial instruments decreases which leads to
liquidity of many banks.
The aim of this study is to explore
the relationship of risk disclosure, risk taking and bank performance. The
disclosure of risk has significance in banking industry because it allow banks
to manage their loans and other financial; activities accordingly. The banking
industry suffers from various types of risks which have to be disclosed
appropriately and a proper mitigation strategy is needed to control or manage
those risk. Through knowing the relationship between risk disclosure and risk
taking the possibilities to create strong risk mitigation strategies will
increase. There is need to investigate how the banks perceive various amount of
risks and how those risks are managed by the banks. The banks take risk to
increase their profitability. As it is obvious that the higher the risk the
more will be the profitability. However the possibility of loss also increase
with the same rate.
Therefore this study will provide a
brief overview regarding the risk taking of bank and its relationship with bank
performance. The motivation of this research is that the banking sector
have faced many financial issues in the past and banking crises has caused
major impact on the economy. There is a need to mitigate the risk through
identifying various risk mitigation strategies. It is obvious that when the
risk is going to managed appropriately it will have impact on the performance
of the bank
2. Theory &
hypotheses Development of Risk Governance, Risk Taking, and Bank Performance
The
study conducted by Vincent Aebi, Gabriele Sabato & Markus Schmid (2012)
have provide deep insights regarding the Risk management bank performance and
corporate governance. In the study the financial crises is discussed and how
financial crises causes problems for various banks. In the study the relationship
of corporate governance and bank performance is examined. In the study the
corporate governance variables were CEO ownership and the size of the bank. The
findings of the study shows that in financial crises the corporate governance
variable were negatively associated with the performance of the bank. The
study has vast scope and future researchers can further investigate the
relationship of corporate governance with the bank performance.
The study conducted by Shams Pathan
&Robert Faff (2013) have discussed the board structure and its impact on
the performance of the bank. The board structure of the bank is evaluated in
terms of gender diversity, board size and independence. The data is gathered
from large US banks from the period of 1997 to 2011. The findings of the
research study shows that the size of the board and independence of directors
have negative impact on the performance of the banks. However the gender
diversity of the bank improves the performance of the bank. The study provides
brief information about how the management of the bank have impact on
performance [4].
Sabur Mollah & Mahbub Zaman
(2015) have provided brief information about the differences between
conventional and Islamic banking. The conventional and Islamic banking
practices are being evaluated from the perspective of corporate governance. In
this study the board structure and Shariah board supervision are investigated
to evaluate how they manage the banks. The data is gathered from the period of
2005 to 2011. The findings of the study shows that the Shariah board
supervision have improved the performance of Islamic banks. The board structure
(board size & independence) have negative impact on the performance of the
banks. Overall the study have indicated the positive impact of the Shariah bard
on the banks [1]
The
researchers Shamsun Nahar & Mohammad Azim (2016) have discussed the risk
disclosure bank performance & cost of capital. The goal of the study is to
examine the relationship between cost of equity, risk disclosure and
performance of the bank in the developing countries. In the study the
researchers have stated that risk disclosure decrease the cost of capital of
the banking organization. The data for the research is gathered from 30
banks who are listed in the stock exchange of Dhaka Bangladesh. The
findings of the study shows that the cost of capital is negatively associated
with risk disclosure. This means that cost of capital is inversely related with
bank performance [5].
Shamsun Nahar, Christine Jubb &
Mohammad I.Azim (2016) have evaluated the relationship between risk governance
and bank performance. The data of the study is gathered from 210 banks and the
data is analyzed by applying regression analysis. The data is gathered for the
period of 2006 to 2012. The findings of the study indicates that there is a
relationship between bank performance and risk governance. The research have
huge future implications and the banks can improve their performance by
focusing on the findings of the study. The research has vast scope because it
has discussed the risk s of the banks from various aspects.
Shamsun Nahar, Mohammad Azim &
Christime Jubb (2014) have discussed how risk disclosure is determined by the
banks. In this study the data is collected from 30 banks which are listed on
the Dhaka Stock Exchange. The data is gathered from the period 2007 to 2012.
The findings of the study shows that the various factors which include
company size board size and risk management unit significantly affect the risk
disclosure in bank. The study has huge significance for the banking
institutions because they have to manage the level of risk otherwise bank can
face financial loss [6].
The literature review have provide
a brief overview regarding the contribution of other researchers who have
conducted research on the risk disclosure and its relationship with the bank
performance. Through literature review it can be seen that there are many
studies who have focused on risk discloser and banking performance however
there are not much studies which have also included the level of risk taking.
Therefore this research study will investigate the relationship of risk taking
and the banking performance as well to reduce research gap which previous
studies have. Through knowing the relationship between risk disclosure and risk
taking the possibilities to create strong risk mitigation strategies will
increase. There is need to investigate how the banks perceive various amount of
risks and how those risks are managed by the banks. The banks take risk to
increase their profitability.
The theoretical framework guide the
research study and help the study to be conducted in an efficient and accurate
manner. The theoretical framework in this study explains the relationship
between risk governance variables and the bank performance. The theoretical
framework establish the relationship between theories that have to be tested
and the timing of the research work. The findings of the study will based on
the relationship between the risk governance and the performance of bank. The
theoretical framework establish in the study help the study to provide a clear
direction and conclude the study in a credible manner. The study focus on the
risk governance & its impact on the bank performance. It means that
the whole study is revolving around the variables of risk governance and their
impact on the bank performance.
The risk governance is being
evaluated in the banks in terms of risk committee and risk disclosure. The
study will going to investigate the relationship of risk disclosure with the
performance of the bank. It is not how much the risk disclosure can improve the
performance or wither the risk disclosure does have relationship with
performance or not. The second variable is the risk committee which is going to
be investigated to know how much risk committee effect the level of bank
performance. The hypotheses are developed which will going to test to provide
brief results regarding the relationship.
H1: risk disclosure has positive relationship with the
bank performance.
The independent variables in this study are risk
disclosure and risk committee. The dependent variable in the study is the
performance of the bank along with the level of risk taking. The theoretical
framework established in the study indicates that the risk disclosure and risk
committee are positively related with bank performance.
H2:
Risk Committee has positive relationship with the bank performance.
The
aim of the study is to explore the relationship between the bank performance
and risk disclosure. In the financial crises it has been seen that the risk
governance in banks were not up to the standards. The banks were not managing
the level of risk properly which become the reason for huge amount of financial
loss. If the banks manage the level of risk appropriately in the first place
than the banking crises might not occur. This banking crises of 2007-2008 shows
the significance of risk management and its relationship with bank performance.
Many studies have investigated the risk governance and banking performance
relationship however there is need to investigate the level of risk taking and
its impact on the banking performance. It has been seen that the higher the
risk the more will be the profit and focusing on this phenomenon many banks
take huge level of risk in order to gain huge amount of profit. However this is
not always the case. The risk governance is being evaluated in the banks in
terms of risk committee and risk disclosure. The study will going to
investigate the relationship of risk disclosure with the performance of the
bank.
H3: The Risk disclosure is
positively associated with risk taking.
The literature review has
shown that the studies primarily focused on risk governance and their impact on
the performance however they have not discussed how the level of risk taking is
managed in the banks and dopes they have any kind of relationship with risk
governance or not. In this study it will be investigated through hypotheses
that risk disclosure and risk commits do have relationship with the level of
risk taking.
H4: The risk
Committee is positively associated with the level of risk taking
The
theoretical framework of the study indicating the things which are going to
investigated in the study. Through investigating the relationship the bank can
improve their risk mitigation strategies and can formulate new strategies.
After the global financial crises things have changed and banks are changing
their risk strategies so that in future no such issue might occur. Therefore it
has become mandatory to explore new ways of improving the risk strategies. The
study will provide opportunities to banks to improve their risk governance. Not
only their performance will be enhanced but also the chances of financial loss
will decrease up to lot of extent.
The aim of the study is
to enhance the information currently available on the risk governance and its
relationship with performance. There are many studies who have provide
detail regarding this topic however there are few studies who have focused on
the level of risk taking . Therefore this study will investigate the aspect of
risk taking along with risk disclosure and risk committee to provide deep
insights regarding risk management in banks.
The study is focusing
majorly over the risk governance to determine its impact over both performance
and risk taking of the banks. It can be seen that the risk governance in the
banks needs special attention so that its impact over its performance,
efficiency & profitability can be managed. If the risk governance is going
to be improved and banks are going to made strong risk management policies than
it will have positive influence on the bank performance. The study will going
to evaluate the current level of risk disclosure and the risk committee and
examine whether the banks have taken any measure regarding risk exposure or not
after the banking crisis of 2007-2008. This study will provide a brief
impression regarding the risk taking of bank and its relationship with bank
performance. The risk revelation policies of various banks are going to be
analyzed critically to explore the rusk mitigation policies and what banks have
understood from the global financial crises.
1. Conclusion
on Risk Governance, Risk Taking, and Bank Performance
If
all the above discussion is summarized than it is evident that. The disclosure
of risk has significance in banking industry because it allows banks to manage
their loans and other financial; activities accordingly. The banking industry
suffers from various types of risks which have to be disclosed appropriately
and a proper mitigation strategy is needed to control or manage those risk.
Through knowing the relationship between risk disclosure and risk taking the
possibilities to create strong risk mitigation strategies will increase.
Therefore, this study will provide a brief overview regarding the risk taking
of bank and its relationship with bank performance. The risk disclosure
policies of various banks are going to be analyzed critically to explore the
rusk mitigation policies and what banks have understood from the global
financial crises.
The theoretical
framework of the study indicating the things which are going to investigated in
the study. Through investigating the relationship, the bank can improve their
risk mitigation strategies and can formulate new strategies. After the global
financial crisis’s things have changed and banks are changing their risk
strategies so that in future no such issue might occur. Therefore, it has
become mandatory to explore new ways of improving the risk strategies. The
study will provide opportunities to banks to improve their risk governance.
The aim of the study is
to explore the relationship between the bank performance and risk disclosure.
In the financial crises it has been seen that the risk governance in banks were
not up to the standards. The banks were not managing the level of risk properly
which become the reason for huge amount of financial loss. If the banks manage
the level of risk appropriately in the first place than the banking crises
might not occur. This banking crises of 2007-2008 shows the significance of
risk management and its relationship with bank performance. Many studies have
investigated the risk governance and banking performance relationship however
there is need to investigate the level of risk taking and its impact on the
banking performance.
It is concluded that the
independent variables in this study are risk disclosure and risk committee. The
dependent variable in the study is the performance of the bank along with the
level of risk taking. The theoretical framework established in the study
indicates that the risk disclosure and risk committee are positively related
with bank performance. The risk governance is being evaluated in the banks in
terms of risk committee and risk disclosure. The study will going to
investigate the relationship of risk disclosure with the performance of the
bank. It is not how much the risk disclosure can improve the performance or
wither the risk disclosure does have relationship with performance or not. The
second variable is the risk committee which is going to be investigated to know
how much risk committee effect the level of bank performance.
It can be said that the
risk was not mitigated or identified properly which caused the financial crises
in the first place. The banking polices the role of the top management and the
accounting standards all held responsible for the global financial crises. At
that time many banks approved huge amount of loans for the houses which leads
to banking crises. The banks did not accurately investigate the financial
condition of the borrowers which cause the crises. The banks invested in the
high risk and complex financial products and due to the crises the
value of the financial instruments decreases which leads to liquidity of many
banks.
References of Risk Governance,
Risk Taking, and Bank Performance
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[1]
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S.
Mollah and M. Zaman, "Shari’ah supervision, corporate governance and
performance: Conventional vs. Islamic banks," Journal
of Banking & Finance, pp. 418-435, 2015.
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[2]
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J.
A. Felicio, R. Rodrigues, H. Grove and A. Greiner, "The influence of
corporate governance on bank risk during a financial crisis," Economic Research, vol. 31, pp.
1078-1090, 2018.
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[3]
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A.
Mongiardino and C. Plath, "Risk governance at large banks: have any
lessons been learned?," Journal
of Risk Management in Financial Institutions, vol. 3, p. 116–123,
2010.
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[4]
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S.
Pathan and R. Faff, "Does board structure in banks really affect their
performance?," vol. 37, p. 1573–1589, 2013.
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[5]
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S.
Nahar, M. Azim and C. A. Jubb, "Risk disclosure, cost of capital and
bank performance," vol. 24, pp. 476-494, 2016.
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[6]
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S.
Nahar, C. Jubb and M. I. Azim, "Risk governance and performance: a
developing country perspective," vol. 31, pp. 250-268, 2016.
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[7]
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V.
Aebi, G. Sabato and M. Schmid, "Risk management, corporate governance,
and bank performance," vol. 36, p. 3213–3226, 2012.
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