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Enterprise Risk Management and Default Risk: Evidence from the Banking Industry

Author

Listed:
  • Lundqvist, Sara

    (The Centre for Finance and the Department of Business Administration, University of Gothenburg)

  • Vilhelmsson, Anders

    (Knut Wicksell Centre for Financial Studies, Lund University)

Abstract

Enterprise risk management (ERM) has emerged as a framework for more holistic and integrated risk management with an emphasis on enhanced governance of the risk management system. ERM should theoretically reduce the volatility of cash flows, agency risk and information risk – ultimately reducing a firm’s default risk. We empirically investigate the relationship between the degree of ERM implementation and default risk in a panel dataset covering 78 of the world’s largest banks. We create a novel measure of the degree of ERM implementation. We find that a higher degree of ERM implementation is negatively related to the credit default swap spread (CDS) of a bank. When a rich set of control variables and fixed effects are included, a one standard deviation increase in the degree of ERM implementation decreases CDS spreads by 21 basis points. The degree of ERM implementation is however not a significant determinant of credit ratings when controls for corporate governance are included.

Suggested Citation

  • Lundqvist, Sara & Vilhelmsson, Anders, 2016. "Enterprise Risk Management and Default Risk: Evidence from the Banking Industry," Knut Wicksell Working Paper Series 2016/2, Lund University, Knut Wicksell Centre for Financial Studies.
    • Handle: RePEc:hhs:luwick:2016_002
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    Cited by:

    1. Bashir, Taqadus & Khalid, Shujaat & Iqbal Khan, Kanwal & Javed, Saman, 2019. "Interest Rate Risk Management by Financial Engineering in Pakistani Non-Financial Firms," MPRA Paper 96426, University Library of Munich, Germany.
    2. Yun, Jiyeon, 2023. "The effect of enterprise risk management on corporate risk management," Finance Research Letters, Elsevier, vol. 55(PB).
    3. Hasan Dinçer & Serhat Yüksel & Fatih Pınarbaşı & Mehmet Ali Alhan, 2020. "Risky Financial Assets in Financial Integration and the Impacts of Derivatives on Banking Returns," World Scientific Book Chapters, in: Stéphane Goutte & Khaled Guesmi (ed.), Risk Factors and Contagion in Commodity Markets and Stocks Markets, chapter 6, pages 133-159, World Scientific Publishing Co. Pte. Ltd..
    4. Evan M. Eastman & Jianren Xu, 2021. "Market reactions to enterprise risk management adoption, incorporation by rating agencies, and ORSA Act passage," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(2), pages 151-180, June.
    5. Ben Kajwang, 2022. "Theoretical review of enterprise risk management culture drivers for insurance firms in Kenya," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(5), pages 210-217, July.
    6. Sorin Gabriel Anton & Anca Elena Afloarei Nucu, 2020. "Enterprise Risk Management: A Literature Review and Agenda for Future Research," JRFM, MDPI, vol. 13(11), pages 1-22, November.
    7. Alessandra Allini & Raffaela Casciello & Marco Maffei & Martina Prisco, 2022. "The national culture as a determinant of ERM quality: Empirical evidence in the European banking context," MANAGEMENT CONTROL, FrancoAngeli Editore, vol. 2022(1), pages 79-102.

    More about this item

    Keywords

    Risk management; Credit risk; Enterprise risk management; Corporate governance; Credit rating;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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