How to measure bank credit risk disclosure? Testing a new methodological approach based on the content analysis framework

Abstract

Risk disclosure is a crucial factor in enhancing the efficiency of financial markets and promoting financial stability. This paper proposes a methodological tool to analyze credit risk disclosure in bank financial reports, based on the content analysis framework. The authors also uses this methodology to carry out an empirical study on a small sample of large Italian banks. The paper provides preliminary empirical evidence that banks differ in their credit risk disclosure, even though they are subject to homogeneous regulatory and accounting requirements. Furthermore, by carrying out a correlation-based network analysis, the paper provides preliminary evidence on the existence of a relationship between credit risk disclosure, bank size, and business model. The existing literature has not provided any methodological tool to analyze qualitative and quantitative profiles of bank credit risk disclosure. In order to fill this gap, we propose an original research methodology to investigate bank credit risk reporting. While previous contributions have examined related aspects adopting automated content analysis techniques, this paper proposes an original and non-automated content analysis approach. Our research has several regulatory and strategic implications and lays the foundation for further research in banking, finance, and accounting.

Credit Risk and Disclosure Behavior in the Bank Industry: Evidence From Saudi Arabia

“…According to Asllanaj (2018), banks might suffer from credit risk for four main reasons: inadequate management practices leading to bad debts; inefficient and ineffective mechanisms to reduce bad debt; illegal insider trading; poor credit management, where techniques or decisions to decrease bad debt are inadequate. Although healthy banking International Journal of Accounting and Financial Reporting ISSN 2162-3082 2021 systems significantly impact economic development, weakly regulated systems may adversely affect the entire economy, leading to a financial crisis (Scannella & Polizzi, 2020). According to the Bank for International Committee (1999), credit risk disclosure regulation is a source of instability in the banking sector.…”

“…Hence, the literature investigating risk disclosure quality based on forward-looking information may be dramatically valuable, particularly on risk disclosure in annual reports using content analysis (Scannella & Polizzi, 2020). In this regard, a significant stream of literature is performed employing content analysis to evaluate reporting of risk (Barth & Landsman, 2010;Scannella, 2018;Scannella & Polizzi, 2018).…”

“…However, the literature is limited to developed countries and focuses only on quantitative risk reporting methods for financial statements (Scannella & Polizzi, 2020). Therefore, a proper investigation on this topic is needed to cover both backward-looking and forward-looking disclosures.…”

“…Scholars adopted different coding schemes when conducting content analysis, including sentences, keywords, or pages as a measurement unit. This method was adopted and congruent with recent risk disclosure studies (Abdallah et al, 2015;Elshandidy et al, 2015;Grassa et al, 2019Grassa et al, , 2020Nahar et al, 2016;Scannella & Polizzi, 2021).…”

European Banking Union and bank risk disclosure: the effects of the Single Supervisory Mechanism

“…The reform has also embraced subsequent revisions to the disclosure requirements aimed at addressing perceived shortcomings in Pillar 3. In this regard, it is important to notice that 2014 Basel III Pillar 3 disclosures requirements have had an important impact on the disclosure provided by European banks, but exclusively in the Pillar 3 disclosure report, which is provided separately from the annual financial reports(Scannella and Polizzi 2021).2 SeeTröger (2014) for a detailed description of the division of labor between the ECB and the NCAs in the SSM.3 A bank was deemed significant if: assets exceeding €30 billion; assets exceeded both €5 billion and 20% of the GDP of the member state in which it is located; it was among the three most significant banks of the country in which it is located; it had large cross-border activities; and it bank received, or had applied for, assistance from euro-zone bailout funds.…”