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Bank Risk Measurement: A Critical Evaluation at a European Bank

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  • Gunnar Wahlström

Abstract

This article assesses bank management’s perspective on the use and effectiveness of the risk measurement system under Basel II that setcapital requirements for banks. These requirements encouraged the use of risk measurement. Semi-structured interviews with various bank managers at Viking Bank (a fictitious name) provide the empirical data for this research. These interviews were conducted after the global financial crisis that led, among other events, to the bankruptcy of Lehman Brothers. Viking Bank was an important European bank that embraced Basel II and risk measurement. In its efforts to implement risk measurement, the bank’s management accounting department was reduced and subordinated to the risk measurement department. Risk measurement information became the bank’s primary source of information for some loans. However, in their decision-making, managers showed mixed support for risk measurement that had, in some instances, become disconnected from operations. For other loans, they preferred to use their so-called Expert Judgement. The narrow and limited career paths available for the risk measurement specialists also reflected the decreased influence of risk measurement on decision-making at the bank.

Suggested Citation

  • Gunnar Wahlström, 2013. "Bank Risk Measurement: A Critical Evaluation at a European Bank," Accounting and Finance Research, Sciedu Press, vol. 2(3), pages 1-24, August.
  • Handle: RePEc:jfr:afr111:v:2:y:2013:i:3:p:24
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    References listed on IDEAS

    as
    1. Kapstein, Ethan B., 1989. "Resolving the regulator's dilemma: international coordination of banking regulations," International Organization, Cambridge University Press, vol. 43(2), pages 323-347, April.
    2. Power, Michael, 2009. "The risk management of nothing," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 849-855, August.
    3. Danielsson, Jon, 2002. "The emperor has no clothes: Limits to risk modelling," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1273-1296, July.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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