A qualitative analysis of bank credit risk disclosure: Evidence from the Canadian and Italian banking sectors

• Published date: 01 October 2022
• Author: Kaouthar Lajili,Sana Mohsni,Salvatore Polizzi,Enzo Scannella
• Date: 01 October 2022
• DOI: http://doi.org/10.1002/jcaf.22577

Received:  April  Revised:  June  Accepted:  June 

DOI: ./jcaf.

RESEARCH ARTICLE

A qualitative analysis of bank credit risk disclosure:

Evidence from the Canadian and Italian banking sectors

Kaouthar Lajili1Sana Mohsni2Salvatore Polizzi3Enzo Scannella3

Telfer School of Management, University

of Ottawa, Ottawa,Canada

Sprott School of Business, Carleton

University, Ottawa, Canada

Department of Economics, Business &

Statistics, University of Palermo, Palermo,

Italy

Correspondence

Salvatore Polizzi, University of Palermo,

Palermo, It aly.

Email: Salvatore.Polizzi@unipa.it

Funding information

Telfer School of Management, University

of Ottawa

Abstract

This paper aims to analyze bank credit risk disclosure practices in two different

geographical contexts characterized by a homogeneous regulatory framework

(Canada and Italy), by means of a qualitative content analysis methodology. We

employ an innovative approach, which allows us to investigate both the qual-

itative and quantitative profiles of disclosures. Unlike an entirely quantitative

approach, this comprehensive methodology allows us to analyze in depth the

disclosure practices of Canadian and Italian banks and detect their common-

alities, differences, points of strength, and weaknesses. Our results show that

although there are some variations in the disclosure practices of Canadian and

Italian banks, the quality of their disclosures is not significantly different. Among

the most relevant differences, it emerges that while Italian banks provide more

comprehensive disclosures, Canadian banks offer a more holistic view on credit

risk. We contribute to the scant literatureon credit risk disclosure by identifying

room for improvement for both Canadian and Italian banks.

KEYWORDS

banking, Canadian banks, credit risk, disclosure, Italian banks

1 INTRODUCTION

In an open economy, bank credit risk disclosure is impor-

tant because it reduces the cost of capital (Barth &

Schipper, ; Botosan, ),serves as an external mech-

anism to monitor the behavior of bank managers (Eng

&Mak,; Ratnovski, ), and supports investors

in measuring bank and managerial performance (Bisoni

et al., ; Nadotti, ;Rutigliano,; Tutino et al.,

). The quality of bank risk disclosure, especially that

of credit risk, is fundamental as credit risk strongly affects

the stability and profitability of commercial banks (Sironi

& Resti, ;Tutino,). Besides, well-functioning

financial markets and adequate investorprotection require

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproductionin any medium, provided the

original work is properly cited.

©  The Authors. Journalof Corporate Accounting & Finance published by Wiley Periodicals LLC.

a transparent banking sector with high disclosure qual-

ity and low information asymmetry (Dell’Atti & Labini,

). Therefore, better understanding banks’ credit risk

disclosure practices is crucial for a better assessment of

a country’s banking sector and the level of protection a

banking system offers to its customers. In this paper, we

useamixedqualitativeandquantitativecontentanaly-

sis to examine bank credit risk disclosure practices in two

different geographical regions (Canada and Italy), char-

acterized by a homogeneous regulatory framework but

different supervisory regimes.

Over the last decades, the literature on risk disclo-

sure in the banking industry has gained popularity and

momentum (Barakat & Hussainey, ;Frolov,;

J Corp Account Finance. ;:–. wileyonlinelibrary.com/journal/jcaf 207

208 LAJILI  .

Polizzi, ), and it currently offers various quantitative

frameworks within the content analysis methodology (see

Krippendorf, ) to examine different aspects of risk

disclosures. These include the use of binary indicators to

capture the presence or absence of specific pieces of dis-

closure (Nahar et al., ; Woods et al., ); the use

of disclosure dictionaries to count the occurrences of spe-

cific words (Altunba et al., ; De Andrés et al., ;

Farina et al., ; Loughran & McDonald, ; Samanta

& Dugal, ); and the analysis of graphical reporting

(Jones et al., ). Despite its relevance in providing an in-

depth analysis of different aspects of banking disclosures,

qualitative content analysis is not widely employed within

this literature, and outside of a few exceptions including

Höring and Gründl () and Scannella and Polizzi (,

), qualitative content analysis has rarely been used to

examine this topic. We intend to fill this gap.

The risk disclosure literature has focused on various

types of disclosures, including not only the disclosure

on banking risks (Birindelli & Ferretti, ;Drago&

Mazzucca, ; Malinconico, ),butalsothatonvar-

ious emerging topics including information technology

(Panetta et al., ), intellectual capital (Birindelli et al.,

), and corporate social responsibility (Carnevale &

Mazzuca, ). Surprisingly, the literature that focuses

specifically on the disclosure on credit risk is particularly

scant, although it is considered as the most important

type of risk for commercial banks. Among the few con-

tributions, we mention Frolov () who focuses on

the Japanese banking industry, and Scannella and Polizzi

(, ), who focus on a sample of Italian banks,

motivated by the features of the national supervisory

enforcement regime.

In this paper,we employ an extended version of the com-

prehensive approach proposed by Scannella and Polizzi

() which allows us to assess both the qualitative

and quantitative aspects of banks’ credit risk disclo-

sures. Unlike purely quantitative approaches, this mixed

approach enables us to provide an in-depth analysis of

the disclosure practices of Canadian and Italian banks,

detect the differences between the two styles/models of

disclosure, determine their strengths and weaknesses, and

understand how each style can improve and develop.

We focus on the Canadian and Italian banking sectors

since they are subject to a harmonized regulatory frame-

work, making their disclosures comparable and suited

for a qualitative content analysis. In this regard, it is

important to remark that content analysis methodologies

are powerful techniques to conduct comparative anal-

yses of disclosures, if the documents being examined

are not too different from each other and provided for

the same purposes (i.e., to inform current and potential

investors). In both countries, a small number of banks

controls the sector, and therefore by focusing on the dis-

closure practices of a relatively small number of banks,

we develop an overview of the disclosure practices of the

sector overall. While the Canadian banking sector has

traditionally been highly concentrated,the Italian bank-

ing sector concentration has recently increased following

a wave of mergers between Italian banks to create large

financial institutions.One major difference between the

two countries is that the Canadian regulators, namely

the Office of the Superintendent of the Financial Insti-

tutions (OSFI) and the Central Bank of Canada, adopt a

non-interventionist approach and do not impose specific

formats banks have to follow to comply with the interna-

tional IAS/IFRS requirements; whereas the Bank of Italy

adopts an interventionist regime and provides detailed

formats banks must follow in the preparation of their

financial reporting in accordance with IAS/IFRS, leav-

ing less room for bank discretionary disclosure decisions

(Bischof, ; Dell’Atti, ;Rutigliano,;Tutino,

).

We offer several contributions to the literature. First,

we add to the credit risk disclosure literature by using

a comprehensive qualitative content analysis to better

understand the disclosure practices of large banks. Second,

to our knowledge, this is the first paper that produces a

comparative analysis of the credit risk disclosure practices

of Canadian and Italian banks. Comparative disclosure

practices of different countries are rarely examined (see

for instance, Dobler et al., ; Linsley et al., ; Grassa

et al., ), particularly the risk disclosure practice using

qualitative content analysis. Third, we compare the dif-

ferences in disclosure practices of banks operating in two

different supervisory enforcement regimes that could sig-

nificantly impact the ways banks provide information to

the public by means of their annual financial reports

(Bischof, ).

The remainder of the paper is organized as follows: Sec-

tion describes the content analysis methodology and the

sample of banks examined; Section shows the detailed

results of the empirical analysis; Section  discusses the

results and Section  concludes.

2METHODOLOGY

In this section, we explain the methodology adopted

to analyze the credit risk disclosure of the Canadian

and Italian banking sectors. We use an extended ver-

sion of the content analysis methodology proposed by

Scannella and Polizzi (), which we tailor to fit the

credit risk disclosure requirements of large banks with

consolidated financial statements prepared in accordance

with IAS/IFRS. The content analysis is carried out by