The Development of Types and Measurement of Banking Risk: A Literature Review

  • Tri Hanani Universitas Mataram
Keywords: Banking, Risk, Risk Measurement


Banking is one of the vital industries of every country. Healthy banking supports the stability of a country's economy so banking risks are crucial to be analyzed. The purpose of this article is to identify banking risk and its measurement as well as to explore the comparison of theories and empirical studies of risk in large and small banks. This article was compiled using the literature review method from several studies related to bank risk and its measurement published in the period 1997 to 2020. This study shows that banking risk is currently divided into eight types, namely: credit risk, market risk, liquidity risk, operational risk, compliance risk, legal risk, reputation risk, and strategic risk. Several theories developed in the banking sector include the unstable banking hypothesis, the too-big-to-fail hypothesis, the agency cost hypothesis, and the small bank advantage hypothesis.


International Monetary Fund., Financial soundness indicators : compilation guide. International Monetary Fund, 2006.

O. Blanchard et al., “Helpful comments on earlier drafts were provided by Corporate governance in the Asian "nancial crisis,” 2000.

S. Bhagat, B. Bolton, and J. Lu, “Size, leverage, and risk-taking of financial institutions,” J Bank Financ, vol. 59, pp. 520–537, Oct. 2015, doi: 10.1016/j.jbankfin.2015.06.018.

E. I. Altman and A. Saunders, “Credit risk measurement: Developments over the last 20 years,” J Bank Financ, vol. 21, no. 11–12, pp. 1721–1742, 1997, doi: 10.1016/S0378-4266(97)00036-8.

Eva Lütkebohmert, Concentration Risk in Credit Portfolios. Berlin, Heidelberg: Springer, 2009.

K. Duellmann and N. Masschelein, “A Tractable Model to Measure Sector Concentration Risk in Credit Portfolios,” SSRN Electronic Journal, Oct. 2006, doi: 10.2139/SSRN.944778.

D. Hendricks and B. Hirtle, “Bank Capital Requirements for Market Risk: The Internal Models Approach.” Accessed: Nov. 07, 2022. [Online]. Available:

S. Varotto, “Liquidity Risk, Credit Risk, Market Risk and Bank Capital.” [Online]. Available:

D. W. Diamond and R. G. Rajan, “Liquidity risk, liquidity creation, and financial fragility: A theory of banking,” Journal of Political Economy, vol. 109, no. 2, pp. 287–327, 2001, doi: 10.1086/319552.

Y. K. Chen, C. H. Shen, L. Kao, and C. Y. Yeh, “Bank Liquidity Risk and Performance,” Review of Pacific Basin Financial Markets and Policies, vol. 21, no. 1, Mar. 2018, doi: 10.1142/S0219091518500078.

M. Adusei, “Bank profitability: Insights from the rural banking industry in Ghana,” Cogent Economics and Finance, vol. 3, no. 1, Jul. 2015, doi: 10.1080/23322039.2015.1078270.

Subramanyam. K.R., Financial Statement Analysis, Elevent Edition. New York: McGraw-Hill Education, 2014.

P. Sturm, “Operational and reputational risk in the European banking industry: The market reaction to operational risk events,” J Econ Behav Organ, vol. 85, no. 1, pp. 191–206, Jan. 2013, doi: 10.1016/j.jebo.2012.04.005.

M. Power, “The invention of operational risk,” Rev Int Polit Econ, vol. 12, no. 4, pp. 577–599, Oct. 2005, doi: 10.1080/09692290500240271.

P. de Fontnouvelle, V. Dejesus-Rueff, J. Jordan, and E. Rosengren, “Using Loss Data to Quantify Operational Risk,” 2003.

“Banking on the Principles: Compliance with Basel Core Principles and Bank Soundness by Asli Demirgüç-Kunt, Enrica Detragiache, Thierry Tressel :: SSRN.” (accessed Nov. 07, 2022).

V. Sundararajan, D. Marston, and Ritu Basu, “Financial System Standards and Financial Stability,” IMF Working Paper, 2001.

F. Fiordelisi, M. G. Soana, and P. Schwizer, “The determinants of reputational risk in the banking sector,” J Bank Financ, vol. 37, no. 5, pp. 1359–1371, May 2013, doi: 10.1016/j.jbankfin.2012.04.021.

J. Xifra and E. Ordeix, “Managing reputational risk in an economic downturn: The case of Banco Santander,” Public Relat Rev, vol. 35, no. 4, pp. 353–360, Nov. 2009, doi: 10.1016/j.pubrev.2009.08.004.

Y. Altunbaş and D. Marqués, “Mergers and acquisitions and bank performance in Europe: The role of strategic similarities,” J Econ Bus, vol. 60, no. 3, pp. 204–222, May 2008, doi: 10.1016/J.JECONBUS.2007.02.003.

M. L. Frigo and R. J. Anderson, “Strategic risk management: A foundation for improving enterprise risk management and governance,” Journal of Corporate Accounting and Finance, vol. 22, no. 3, pp. 81–88, Mar. 2011, doi: 10.1002/jcaf.20677.

D. Liang, C. C. Lu, C. F. Tsai, and G. A. Shih, “Financial ratios and corporate governance indicators in bankruptcy prediction: A comprehensive study,” Eur J Oper Res, vol. 252, no. 2, pp. 561–572, Jul. 2016, doi: 10.1016/j.ejor.2016.01.012.

L. Laeven, L. Ratnovski, and H. Tong, “Bank size, capital, and systemic risk: Some international evidence,” J Bank Financ, vol. 69, pp. S25–S34, 2016, doi: 10.1016/j.jbankfin.2015.06.022.

Gary H. Stern and Ron J. Feldman, “Too Big To Fail: The Hazards of Bank Bailouts,” J Econ Behav Organ, vol. 56, no. 3, pp. 448–450, 2005.

A. N. Berger and L. K. Black, “Bank size, lending technologies, and small business finance,” J Bank Financ, vol. 35, no. 3, pp. 724–735, Mar. 2011, doi: 10.1016/j.jbankfin.2010.09.004.

J. E. Mcnulty, A. O. Akhigbe, and J. A. Verbrugge, “Small bank loan quality in a deregulated environment: the information advantage hypothesis,” 2001.

D. A. Carter, J. E. Mcnulty, and J. A. Verbrugge, “Do Small Banks have an Advantage in Lending? An Examination of Risk-Adjusted Yields on Business Loans at Large and Small Banks,” Kluwer Academic Publishers, 2004.

X. mei Zhang, Z. lin Song, and Z. Zhong, “Does ‘small bank advantage’ really exist? Evidence from China,” International Review of Economics and Finance, vol. 42, pp. 368–384, Mar. 2016, doi: 10.1016/j.iref.2015.10.009.

S. Sumiyana and T. Hanani, “Does the indonesian banking architecture matter substantively? The case of improving understandability and comparability,” Journal of International Studies, vol. 14, no. 3, pp. 73–92, 2021, doi: 10.14254/2071-8330.2020/14-3/5.