Enterprise Risk Management Implementation and Default Risk: Evidence of Bank Industry in China and Nordic Countries

Abstract: With the development of the global economy in the 21st century, enterprise risk management (ERM) has been more impactfully implemented by firms. Academics have studied the relationship between ERM and firms’ performance, yet few studies have covered the relationship between ERM and default risk, let alone the comparison study between banks in China and banks in Nordic countries, the two important markets in Asia and Europe. This study aims to investigate the relationship between Enterprise Risk Management implementation (ERM) and default risk under the bank industry in both China and Nordic Countries. The study will also compare the results and dig out the reasons behind the different outcomes across the countries. Our results indicate the same trend as expected that ERM has a significant impact on a bank’s default risk no matter CDS or credit ratings as an indicator of default risk. Geographically, this impact is more substantial for Chinese banks rather than in Nordic countries ones due to the performance pressure and investment in internal control systems. However, the influence of ERM on default risk cannot be explained much in the variation of dependent variables when using credit ratings as an indicator of default risk.