The role of financial accounting information in shaping risk management practices of Maltese commercial banks

Abstract

PURPOSE: The study is guided by three objectives within the context of Maltese commercial banks: (1) evaluating how financial accounting information supports risk management practices; (2) identifying which financial metrics are most pertinent to the assessment of credit, liquidity, and market risk; and (3) assessing the effectiveness of risk disclosures in promoting transparency and enhancing risk management practices. DESIGN: A qualitative research design was adopted. Semi-structured interviews were conducted with twenty-three participants, including eighteen commercial banks representatives, four Big-4 firm representatives, one advisor, and one banking supervision representative. FINDINGS: Financial accounting information was identified as the starting point for risk management, offering visibility into risk exposures and forming the foundation for key risk indicators and forecasting. In turn, the use of key financial metrics sharpens banks’ assessment of credit, liquidity, and market risks. Underpinning this process, the findings indicate that effective risk management relies on close collaboration between finance and risk functions. However, financial accounting alone is insufficient and must be complemented by additional data sources, including internal reports and forward-looking inputs. Key limitations were identified, including data quality issues arising from cross-departmental inconsistencies, limited granularity, delayed reporting, its backward-looking nature, and challenges in reconciling data across fragmented systems. In addition, risk disclosures were seen as tools for enhancing transparency and internal risk management. However, their effectiveness was constrained by limited readability, excessive discretion, and compliance burdens, with the cost-benefit analysis negatively skewed. CONCLUSIONS: This study concludes that while financial accounting and risk disclosures support risk management in Maltese commercial banks, neither is fully effective in isolation. Their value lies in integration with additional data and close alignment between finance and risk functions. Ultimately, effective risk management is a dynamic process requiring reliance beyond any single tool. IMPLICATIONS: This study underscores the role of financial accounting in risk management and urges clear and more meaningful risk disclosures. The recommendations aim to support Maltese banks in improving cross-functional integration, risk governance, and risk disclosure practices.