Risk Disclosure Policies: A cross-sectional analysis of the Greek Banking Industry

1. Risk Disclosure Policies: A cross-sectional analysis of the Greek Banking Industry Dr. Yiannis Anagnostopoulos Dr. Rosemary Skordoulis Kingston University, UK London School of Business and Management, UK Y.Anagnostopoulos@kingston.ac.ukrskordoulis@lsbm.org.uk

2. What prompted this research • The 2007 crisis came to further highlight the inadequacies of existing regulations. • 2008: The country’s low disclosure ranking (Cerf Index), • 2010: Stress testing exercises of the Greek banking industry, the failure of the Agricultural Bank of Greece (ATE) • 2010: the demand disclosing information showing how Greece and Greek banks used derivatives to manage earnings and hide their deficits

3. Background – Greek Banking Emphasizes dependencies via statutory control, secrecy, uniformity and conservatism (Gray 1988) Institutional setting depicted as a fragile institutional environment; topical market has a meagre legal regime, enforcement and transparency rules (Ballas;1998) High levels of discretion, poor institutional setting and low level of monitoring creates the conditions for earnings management to materialize (Tzovas, 2006) Government intervention and support: Greek banks hold 75% of all invested assets in ASE (Artikis, 2008)

4. Specific Aim:To evaluate the impact that Basel II had on the volume and quality of credit risk and interest rate risk disclosures in the Greek banking sector • Examine the level of disclosures in the periods right before and after the implementation of Basel II and IFRS requirements; • Examine the extent to which risk disclosure practices have evolved

5. 4 Objectives: 1: To test whether the application of Basel II increased the volume of banks’ risk disclosures in the Greek region. 2: To test whether a potential relationship exists among variables such as bank size, 3: profitability and 4: risk profile and the volume of risk disclosures.

6. Measures Selected • Size: Total Assets & Market Capitalization. • Profitability: Return on Assets (ROA) • Risk profile: Book-to-Market ratio

7. Methodology Content Analysis in depth examination of (annual, audited) published financial statements to measure the degree of disclosure Textual analysis includes thematic; meaning-oriented content analysis where the whole text is analysed decompose information on a sentence-by-sentence basis so as to achieve greater informative content

8. Methodology • Coding Grid

9. Coding Categories

10. Sample 23% of the population, 75% of Greek regulated banks

11. Descriptive Analysis 1

12. Descriptive Analysis…cont’ed…

13. Descriptive analysis…cont’ed • Qualitative neutral news &explanations; favoured; provide assurances / not bound to any future promises • Positive/negative future disclosures avoided • ‘Cloud’ market monitoring - market discipline • Do not provide for any sort of specific actions or results regarding the management of the risk

14. results present a largely unequal distribution of disclosures • in general, Greek banks tend to disclose more qualitative information rather than quantitative for both years examined (before and after) • Disclosures made based on scepticism and reservation

15. In summary • reservation in disclosing more than what is deemed as the minimum required information set • qualitative information: the degree of ease for promoting their own perspective on the matter / such type of information is not easily qualified; • quantitative risk information possessing greater value to qualitative, future information hence future predictions • generalism on the valuation of exposures affected by the market turmoil and their accounting;

16. Hypotheses Testing - Variables

17. Results • Interest rate risk disclosures are significantly greater (p = 0.011) but credit risk disclosures are not. • The question that rises at this point is if the accord managed to have a crucial impact on important areas of banking in Greece or just on issues of lower significance for the industry; or if the country’s regulatory system selectively chooses which aspects of international regulation to harmonise and which not.

18. Size and Disclosures

19. The size of the institutions does not correlate with the amount of risk disclosures at any level. • No significant correlation is observed between either credit risk, interest rate risk or/and their total with total assets and market capitalization for either years (2005 and 2008). • Goes against earlier studies (see for example, Botosan, 1997; Street and Bryant, 2000; Al-Saeed, 2006; Mangena, 2007)

20. Profitability

21. Profitability • no significant association between profitability and the quantity disclosures of either credit risk, interest rate risk or their total for any of the examined years. • Most profitable firms reluctance to disclose much of their risk related information which is considered to be proprietary in fear that their competitors will try to copy them to their advantage. In addition, • It follows that an internal decision to provide more (than the minimum necessary) information to the public is based on a cost-benefit analysis. also documented in Skinner, 1994; Healy and Palepu, 1993; and Botosan, 2000).

22. Level of Risk and Disclosures

23. Risk and Disclosures • Table reveals no significant correlation exists between the disclosure amounts of credit risk, interest rate risk or their total with the book-to-market ratio • Riskier banks do not try to offer more information to the marketplace in order to reassure the participants that their risk is manageable and under control by the risk management division. • It is quite possible that riskier banks try to keep a low profile by avoiding a display of much risk related information to the market participants.

24. ‘Disclosure position’ first quoted by Gibbins et al. (1990) whereby depending on whether management plays an active or passive role in controlling information a dual dimension of disclosure emerges: ritualism and opportunism. • The former relates to blind devotion to predefined disclosure standards while the later relates to the propensity of directors to hunt for company explicit benefits in the disclosure (or non-disclosure) of financial information. • The results are also in line with prior research supporting the retrospective rationality and esteem-defensive behaviour, detected especially in circumstances of adverse economic conditions (see for example, Bettman & Weitz, 1983; Staw, 1980).

25. IN CONCLUSION… Generally quantity of disclosures is statistically greater after Basel II. But, is the implementation the real cause of this increase? - No quasi-norm relationship exists (or even existed before the implementation of Basel II) - loose supervision in the Greek banking sector; =>Bad management, corruption; Larger banks & smaller competitors; => low quantity of disclosures and transparency issues in the industry;

26. Lack of quantitative information needs to be reversed more quantitative information to be disclosed; • 2. Future information is more valuable to investors compared to past data, the amount of future risk information should also be raised; • 3. Quarterly reports should also be regulated to the extent of being able to grasp the continuous changing nature of risks; • 4. Softer issues must also be addresses in a compulsory manner; liquidity

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