An analysis of the relation between enterprise risk management (ERM) information disclosure and traditional risk measures in the US banking sector

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Abstract

The purpose of this article is to validate the quality and the relevance of enterprise risk management (ERM) information disclosure by analyzing the relation between the different dimensions of ERM disclosed in the annual report and the traditional measures of risk in the US banking sector. We use content analysis to measure ERM dimensions and a correlation analysis to document the links between risk exposure, consequences, and strategies (Aebi, Sabato, & Schimd, 2012), and the traditional measures of risk (Schnatterly, Clark, Howe, & DeVaughn, 2019) disclosed in the annual reports from 2006 to 2009. We then separately make the analysis for the period before and after the crisis to identify any effect of the crisis on ERM information’s ability to predict and reflect the banking sector’s traditional risk (Maingot, Quon, & Zéghal, 2018). Our results reveal the overall validity of ERM information in assessing traditional risk measures through a significant correlation between ERM exposure, consequences and strategies, and most of the traditional measures of risk. Finally, we confirmed the relevance and the robustness of our results through a portfolio analysis approach. This research sheds new light on the relevance of ERM information by introducing a new framework and a new methodology for assessing the validity of this information within the banking sector, where risk management plays a vital role. The results are potentially useful for banks regulators as well as for producers and users of the information on banking risks.

Keywords: ERM, Traditional Risk Measures, US Banking Sector, Financial Crisis

Authors’ individual contribution: Conceptualization – D.Z., M.El A., and R.G.; Methodology – D.Z., R.G., and M.El A.; Validation – R.G. and D.Z.; Formal Analysis – R.G., D.Z., and M.El A.; Investigation – M.El A. and R.G.; Writing – R.G., D.Z., and M.El A.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, G38, G28

Received: 29.02.2020
Accepted: 16.04.2020
Published online: 27.04.2020

How to cite this paper: Gouiaa, R., Zéghal, D., & El Aoun, M. (2020). An analysis of the relation between enterprise risk management (ERM) information disclosure and traditional risk measures in the US banking sector. Risk Governance and Control: Financial Markets & Institutions, 10(1), 61-74. https://doi.org/10.22495/rgcv10i1p5