Evidence of Market Discipline Through Operational Risk Disclosures in Commercial Banking Sector of Pakistan

Fareeha Khalil, Hassan Mobeen Alam

Abstract


This study investigates the evidence of existence of market discipline through Operational risk disclosures under Basle Accord-II among commercial banks of Pakistan during years 2006 to 2014. Content Analysis of operational risk disclosure words is conducted to ascertain extent of market discipline. The findings indicate that the banks have growing awareness about operational risk and its disclosures. The results reveal that most of disclosures are narrative and of voluntary nature, showing existence of market discipline over study period.

The results have given useful implications for risk managers to exploit risk information as risk management tool and for regulators as to how market discipline may be used in supervisory review.  


Keywords


Market Discipline; Operational Risk Disclosures; Banking Sector

References


Agarwal, P. K., & Rai, R. (2011). Performance of Public Sector Banks in the New Economy: A Comparison with Private Sector Banks. TEN, 43.

Annual Reports of Allied Bank Limited. (2006-2014).

Annual Reports of Bank Alfalah Limited. (2006-2014).

Annual Reports of Askari Bank Limited. (2006-2014).

Annual Reports of Bank Al-Habib. (2006-2014).

Annual Reports of Bank of Punjab. (2006-2014).

Annual Reports of Faysal Bank Limited. (2006-2014).

Annual Reports of Habib Metro Bank. (2006-2014).

Annual Reports of Habib Bank Limited. (2006-2014).

Annual Reports of Muslim Commercial Bank. (2006-2014).

Annual Reports of National Bank of Pakistan. (2006-2014).

Annual Reports of NIB Bank. (2006-2014).

Annual Reports of Standard Chartered Bank. (2006-2014).

Annual Reports of SILK Bank Limited. (2006-2014).

Annual Reports of Soneri Bank Limited. (2006-2014).

Annual Reports of Summit Bank Limited. (2006-2014).

Annual Reports of United Bank Limited. (2006-2014).

Bank for International settlement (1999), “Mr McDonough discusses the changing nature of banking, risk and capital regulation”, Speech by the President of the Federal Reserve Bank of New York, Mr William J McDonough, 29th Annual Banking Symposium, Bank and Financial Analysts Association, New York City

Bank for International settlement (2001), “Basle II: The New Basle Capital Accord - second consultative paper”

Bank for International settlement (2004), “Basle II: International Convergence of Capital Measurement and Capital Standards: a Revised Framework”

Bank for International Settlement (2005), “Basle II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework”

Bliss, R. R., & F

lannery, M. J. (2002). Market discipline in the governance of US bank holding companies: monitoring vs. influencing. European Finance Review, 6(3), 361-396.

Caruana, J. (2011). Financial Stability and Risk Disclosure. Keynote Speech to the FSB.

Caprio, G., & Honohan, P. (2004). Can the Unsophisticated Market Provide Discipline? World Bank Policy Research Working Paper(3364).

Caruana, J. (2011). Financial Stability and Risk Disclosure. Keynote Speech to the FSB.

Chalupka, R., & Teply, P. (2008). Operational Risk Management and Implications for Bank’s Economic Capital–A Case Study: Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies.

Chernobai, A. S., Rachev, S. T., & Fabozzi, F. J. (2008). Operational risk: A guide to Basle II capital requirements, models, and analysis (Vol. 180): Wiley.

Cihak, M. (2004). Designing stress tests for the Czech banking system: Czech National Bank, Research Department.

Copeland, R., & Fredericks, W. (1968). Extent of disclosure. Journal of Accounting Research, 106-113.

De Fontnouvelle, P., Jesus-Rueff, D., Jordan, J., & Rosengren, E. (2003). Using loss data to quantify operational risk. Available at SSRN 395083.

De Fontnouvelle, P., Jesus-Rueff, D., Jordan, J., & Rosengren, E. (2003). Using loss data to quantify operational risk. Available at SSRN 395083.

Demirgüç-Kunt, A., & Huizinga, H. (2011). Do we need big banks? evidence on performance, strategy and market. Evidence on Performance, Strategy and Market (February 1, 2011). World Bank Policy Research Working Paper Series, Vol.

Dima, A. (2009). Operational risk assessment tools for quality management in banking services. Amfiteatru Economic Journal, 11(26), 364-372.

Dutta, K., & Perry, J. (2006). A tale of tails: An empirical analysis of loss distribution models for estimating operational risk capital.

Ebnother, S., Vanini, P., McNeil, A., & Antolinez, P. (2003). Operational Risk: A Practicioner's View. Journal of Risk.

El Haija, M. F. A., & Al Hayek, A. F. (2012). Operational Risk Disclosures in Jordanian Commercials Banks: It’s Enough. International Research Journal of Finance and Economics(83).

Embrechts, P., Frey, R., & McNeil, A. (2005). Quantitative risk management. Princeton Series in Finance, Princeton.

Frolov, M. (2007). Why do we need mandated rules of public disclosure for banks? Journal of Banking Regulation, 8(2), 177-191.

Gunther, H., & Christian , W. (2006). Determinants of operational risk reporting in the banking industry. Journal of Risk, 49-74.

Gup, B. E. (2003). The future of banking: Greenwood Publishing Group.

Hain, S. (2009). Managing operational risk: Creating incentives for reporting and disclosing. Journal of Risk Management in Financial Institutions, 2(3), 284-300.

Harrington, S. E. (2005). Capital adequacy in insurance and reinsurance. Capital adequacy beyond Basle: banking, securities, and insurance, 87.

Harmantzis, F. (2002). Operational Risk Management in Financial Services and the New Basle Accord. working paper, Stevens Institute of Technology.

Höring, D., & Gründl, H. (2011). Investigating risk disclosure practices in the European insurance industry. The Geneva Papers on Risk and Insurance-Issues and Practice, 36(3), 380-413.

Htay, S. N. N., & Salman, S. A. (2015). Operational and Liquidity Risk Information Disclosure Practices by Malaysian Listed Banks. International Business Management, 9(1), 60-64.

Jordan, J. S., Peek, J., & Rosengren, E. S. (2000). The market reaction to the disclosure of supervisory actions: Implications for bank transparency. Journal of Financial Intermediation, 9(3), 298-319.

Kloptchenko, A., Eklund, T., Karlsson, J., Back, B., Vanharanta, H., & Visa, A. (2004). Combining data and text mining techniques for analysing financial reports. Intelligent systems in accounting, finance and management, 12(1), 29-41.

Kothari, S., Li, X., & Short, J. (2008). The Effect of Disclosures by Management, Analysts, and Financial Press on Cost of Capital, Return Volatility, and Analyst Forecasts: A Study Using Content Analysis.

Kravet, T., & Muslu, V. (2013). Textual risk disclosures and investors’ risk perceptions. Review of Accounting Studies, 18(4), 1088-1122

Lajili, K., & Zeghal, D. (2005). A content analysis of risk management disclosures in Canadian annual reports. Canadian Journal of Administrative Sciences, 125-142.

Lore, M., and Lev Borodovsky editors, 2000, The Professional’s Handbook of Financial Risk

Management (Oxford: Reed Educational and Professional Publishing).

Masood, O., & Fry, J. (2012). Risk management and Basle-Accord-

implementation in Pakistan. Journal of Financial Regulation and Compliance, 20(3), 293-306.

Mori, T., Hiwatashi, J., & Ide, K. (2000). Measuring Operational Risk in Japanese Major banks. Bank of Japan, Financial and Payment System Office Working Paper No. 00-1, July.

Miihkinen, A. (2012). What drives quality of firm risk disclosure?: the impact of a national disclosure standard and reporting incentives under IFRS. The International Journal of Accounting, 47(4), 437-468

Murata, K., & Hori, M. (2006). Do small depositors exit from bad banks? Evidence from small financial institutions in japan*. Japanese economic review, 57(2), 260-278.

Nier, E., & Baumann, U. (2006). Market discipline, disclosure and moral hazard in banking. Journal of Financial Intermediation, 15(3), 332-361.

Nier, E., & Baumann, U. (2006). Market discipline, disclosure and moral hazard in banking. Journal of Financial Intermediation, 15(3), 332-361.

Ojo, M. (2010). Risk management by the Basle Committee: Evaluating progress made from the 1988 Basle Accord to recent developments. Journal of Financial Regulation and Compliance, 18(4), 305-315.

Oliveira, J., Rodrigues, L. L., & Craig, R. (2011). Voluntary risk reporting to enhance institutional and organizational legitimacy: Evidence from Portuguese banks. Journal of Financial Regulation and Compliance, 19(3), 271-289.

Oliveira, J., Rodrigues, L. L., & Craig, R. (2013). Technical Note: Company Risk-related Disclosures in a Code Law Country: A Synopsis. Australasian Accounting Business and Finance Journal, 7(1), 123-130.

Oliveira, J., Rodrigues, L. L., & Craig, R. (2013). Technical Note: Company Risk-related Disclosures in a Code Law Country: A Synopsis. Australasian Accounting Business and Finance Journal, 7(1), 123-130.

Oliveira, J., Rodrigues, L. L., & Craig, R. (2011). Voluntary risk reporting to enhance institutional and organizational legitimacy: Evidence from Portuguese banks. Journal of Financial Regulation and Compliance, 19(3), 271-289.

Ozkan, F. G. (2005). Currency and financial crises in Turkey 2000–2001: bad fundamentals or bad luck? The World Economy, 28(4), 541-572.

Penas, M. F., & Tümer-Alkan, G. (2010). Bank disclosure and market assessment of financial fragility: evidence from Turkish banks’ equity prices. Journal of Financial Services Research, 37(2-3), 159-178.

Perkins, W. C. (2013). The Fall of the House of Credit: What Went Wrong in Banking and What Can be Done to Repair the Damage?, by Alistair Milne. Eastern Economic Journal, 39(2), 278-280.

Penas, M. F., & Tümer-Alkan, G. (2010). Bank disclosure and market assessment of financial fragility: evidence from Turkish banks’ equity prices. Journal of Financial Services Research, 37(2-3), 159-178.

Rippel, M., & Teplý, P. (2011). Operational risk–scenario analysis. Prague Economic Papers, 20(1), 23-29.

Rogers, J. L., Van Buskirk, A., & Zechman, S. L. (2011). Disclosure tone and shareholder litigation. The Accounting Review, 86(6), 2155-2183.

Rosengren, E. (2006). Scenario Analysis and the AMA. Federal Reserve Bank of Boston.

Rosengren, E. (2006). Scenario Analysis and the AMA. Federal Reserve Bank of Boston.

Safiullah, M. (2010). Superiority of conventional banks & Islamic banks of Bangladesh: a comparative study. International Journal of Economics and Finance, 2(3), P199.

Sánchez-Ballesta, J. P., & Lloréns, M. B. (2010). Monitoring, reputation and accountability in issuing banks in mid-nineteenth-century Spain. Explorations in Economic History, 47(4), 403-419.

Tadesse, S. (2006). Banking Fragility & Disclosure: International Evidence. William Davidson Institute Working Paper

Vauhkonen, J. (2012). The impact of Pillar 3 disclosure requirements on bank safety. Journal of Financial Services Research, 41(1-2), 37-49.

Woods, M., & Marginson, D. (2004). Accounting for Derivatives: An Evaluation of Reporting Practice by UK Banks. European Accounting Review, 373-391.

Yen, A. C., Eric Hirst, D., & Hopkins, P. E. (2007). A content analysis of the comprehensive income exposure draft comment letters. Research in Accounting Regulation, 19, 53-79.

Yoon, Y., & Swales, G. (1991). Predicting stock price performance: A neural network approach. Paper presented at the System Sciences, 1991. Proceedings of the Twenty-Fourth Annual Hawaii International Conference on.

Zhang, Y., Wu, M.-l., & Mi, Q.-w. (2012). Operational risk management of commercial bank of China based on the revenue model of the CAPM model. Advances in Applied Economics and Finance, 1(2), 133-137




DOI: http://dx.doi.org/10.22555/pbr.v20i3.394

Refbacks

  • There are currently no refbacks.


Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.