Risk management practices and credit risk of the significantly supervised European banks

Abstract

Purpose

This paper aims to examine the influence of risk management (RM) practices on the credit risk of significantly supervised European banks.

Design/methodology/approach

To avoid regulatory and reporting discrepancies, this paper samples banks that come under the direct supervision of the European Central Bank. Significantly supervised European Banks are selected for the five years from 2013 to 2017. The RM and governance data is manually drawn (from annual reports, registration documents, governance and RM reports), and financial data sets are also used (from Moody’s BankFocus and ORBIS).

Findings

The results indicate that strong risk control and supervision by a powerful chief risk officer (CRO) reduces banks’ credit risk. Banks with sufficiently powerful and independent CROs tend to manage their risks effectively, therefore reporting lower credit risk.

Research limitations/implications

European Union introduced Capital Requirement Directive IV in 2013 and new guidelines on the banks' internal governance in 2017, which were to be implemented in 2018. Thus, this paper limited the sample to five years (from 2013 to 2017) to avoid inconsistencies in the results. Future studies can extend the research and compare banks' credit risk before and after the implementation of regulatory guidelines.

Practical implications

Since the global financial crisis, the regulatory environment has sufficiently changed. Hence, this study reveals that not all RM practices but a few important ones reduce credit risk.

Social implications

Effective risk control and supervision at the bank level can lower credit risk, ultimately enhancing overall financial stability.

Originality/value

Most existing studies focus on classic governance indicators to analyze banks’ credit risk; however, this paper considers risk governance indicators which include RM practices used by European banks. Moreover, existing studies in this line focus on the crisis period of 2007–2008. This paper considered the postfinancial crisis period, specifically after the implementation of the Capital Requirements Directive IV at the European level.

Citation

Qureshi, A. and Lamarque, E. (2023), "Risk management practices and credit risk of the significantly supervised European banks", Journal of Financial Regulation and Compliance, Vol. 31 No. 3, pp. 261-280. https://doi.org/10.1108/JFRC-12-2021-0117