Risk governance and bank risk of public commercial banks of OECD

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Abstract

This study investigates the impact of risk governance on bank risk within the Organisation for Economic Co-operation and Development (OECD) public commercial banks. Utilizing Knight’s (1921) distinction between risk and uncertainty, it emphasizes the roles of key figures like bank directors, the chief risk officer (CRO), and the chief financial officer (CFO) in risk management. The research employs multivariate regression analysis and principal component analysis (PCA) to reveal a positive correlation between risk governance and the Tier 1 capital ratio, indicating that effective governance leads to reduced bank risk and increased financial stability. This finding is consistent with Aebi et al.’s (2012) study on risk management and bank performance. These results underscore the crucial role of robust risk governance in banking, suggesting that enhanced governance practices can significantly mitigate risks. The study contributes to the existing literature by providing empirical evidence supporting the quantification of risk through governance mechanisms, aligning with, and enriching current theoretical frameworks. While highlighting the importance of these findings, the study also acknowledges its limitations, such as potential endogeneity issues, and suggests directions for future research to expand the understanding of risk governance’s impact on bank behavior, including the exploration of additional variables and the integration of qualitative methodologies. This research holds significant implications for banking institutions and regulatory bodies, advocating for a deeper examination of risk governance strategies in banking.

Keywords: Risk Governance, Bank Risk, Tier 1 Capital Ratio, OECD Banks

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G32, G21, G28, F36

Received: 20.12.2023
Accepted: 16.02.2024
Published online: 20.02.2024

How to cite this paper: Malik, M. (2024). Risk governance and bank risk of public commercial banks of OECD. Risk Governance and Control: Financial Markets & Institutions, 14(1), 19–34. https://doi.org/10.22495/rgcv14i1p2