Bank Risk Measurement: A Critical Evaluation at a European Bank

The Basel Committee on Banking Supervision’s second Basel Accord (Basel II) recommends risk measurement guidelines that banks can use to set their minimum capital requirements. In the European Union, Basel II is implemented by Directives 2006/48/EC and 2006/49/EC. These Directives were adopted in 2006 and came into force on 1 January 2007. The main difference between Basel II and its predecessor, Basel I, is that Basel II encourages bank officers to take risk measurement into consideration in their daily operational decisions. The incentive for banks to use risk measurement is that, under Basel II, they may be able to reduce their capital reserves. With more capital available for investment, banks may thus increase their investment yield (ceteris paribus). (Note 1) Nevertheless, serious doubts have been raised about the regulation of banks and their use of risk measurement (Beck, 1992; Mikes, 2009; 2011; McGoun, 1992; 1995; Power, 2004; 2007; 2009). These doubts are discussed in the literature review below.

Today the four listed banks in the European country of this study have implemented risk measurement systems for use in daily decision-making. Despite its very advanced risk measurement system, one of these banks, Viking Bank, (Note 2) nearly failed following the collapse of Lehman Brothers in 2008. However, Viking Bank’s use of risk measurement information in the crisis has not been thoroughly examined. In this context, this article addresses three issues: first, the accounting management issue (Note 3) related to how bank managers react to the imposition of international regulations; second, the management issue of whether bank managers trust the risk management information they receive; and third, the personnel issue of career opportunities for risk measurement specialists.

It has been claimed that in the financial crisis following the failure of Lehman Brothers in
2008, management accounting has not been received the criticism it may deserve. As an example, the U.S.

Congressional reports on the financial crisis (The Financial Crisis Inquiry Report. 2011, Wall Street and the Financial Crisis, 2011) do not address the management accounting issue. Rather, they conclude that the crisis was an avoidable management crisis. However, because management accounting is the source of essential information, senior bank managers cannot afford to neglect it. The information provided by management accounting may help management avoid such crises.

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(Author: Gunnar Wahlström. Published by Sciedu Press)