Title:
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Effect of internal controls on credit risk among listed Spanish banks
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Author:
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Akwaa Sekyi, Ellis Kofi; Moreno Gené, Jordi
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Notes:
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Purpose: The paper examines the effectiveness of internal control systems, explores
the exposure of Spanish banks to the dangers of default as a result of internal control
systems and establishes a relationship between internal controls and credit risk.
Design/methodology/approach: Quantitative research approach is used to test
hypotheses on the relationship between internal controls and credit risk among listed
banks in Spain. Data from Bankscope and company websites from 2004-2013 were
used. Generalized Least Squares (random effect) econometric estimation technique was
used for the model.
Findings: We find that internal control systems are in place but their effectiveness
cannot be guaranteed. This exposes Spanish listed banks to serious default situations.
There is significant effect of internal controls on credit risk especially the control
environment, risk management, control activities and monitoring. The non-disclosure of
material internal control weakness is a contributory factor to the ineffective internal
control systems. There is however a perceived board ineffectiveness which does not
augur well for effective internal control systems. Board characteristics for Spanish
banks confirm the agency theory.
Research limitations/implications: Data unavailability for certain years, variables
and many inactive banks did not permit a larger sample size than expected. The use of
quantitative variables lacks flexibility. Practical implications: Bank management will find the work useful to ensure strict
enforcement of internal control mechanisms and see it as both credit risk and
operational risk issues. Central bank should hurry to compel banks to disclose material
internal control weakness as provided in the reviewed COSO framework.
Social implications: Ineffective internal controls lead to credit risks, bank closure and
loss of investments. Society suffers a lot from such losses and contagion. Disclosure of
material internal control weakness is a social responsibility of banks.
Originality/value: The authors are yet to come across the use of purely quantitative
variables to model the effect of elements of internal controls on credit risk. This study
opens and adds a new dimension of internal controls not only to be seen as operational
risk issue but also credit risk. |
Subject(s):
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-Agency problem -Banking -Credit risk |
Rights:
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cc-by-nc (c) Moreno et al., 2016
http://creativecommons.org/licenses/by-nc/3.0/es/
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Document type:
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article publishedVersion |
Published by:
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OmniaScience
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