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The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx

Contents lists available at ScienceDirect

The Quarterly Review of Economics and Finance

journal homepage: www.elsevier.com/locate/qref

Measuring enterprise risk management implementation: A

multifaceted approach for the banking sector
Mukhtar Adam a , Alaa. M. Soliman b,∗ , Nehal Mahtab b
a
Zenith Bank, Victoria Island, Nigeria
b
Leeds Business School, School of Economics, Analytics and International Business, Leeds Beckett University, UK

a r t i c l e i n f o a b s t r a c t

Article history: This paper contends that the use of alternative constructs as Enterprise Risk Management (ERM) measures
Received 27 September 2020 has made a partial contribution to the different and contradictory results provided by various empirical
Received in revised form studies. It further argues that the comprehensive nature of Enterprise Risk Management implies that
18 December 2020
its adoption and implementation affect different aspects of firms and, therefore, the most appropriate
Accepted 9 January 2021
construct to measure it should be equally comprehensive in order to capture all possible signals, outputs
Available online xxx
and effects from the features of a firm. Secondly, the specialised nature of banking operations and the
associated risk necessitates risk measures that suit the peculiarities of the sector and in this study we have
JEL classification:
G31
proposed banking sector specific ERM model. In this regard, we propose a comprehensive methodology
G32 and multifaceted approach to determining ERM measures for the banking sector, taking cognisance of the
G21 various components of ERM and the specific needs of the sector. In our proposed comprehensive method-
ology for determining ERM measures for the banking sector, we combined two important models: the
Keywords: ERM model for the banking sector and the CAMELS model for assessing the performance of banks. The
ERM
integration of these two models provides a comprehensive and all-encompassing approach for determin-
CAMELS
ing ERM measures for the banking sector. Our model is novel and offers a significant contribution to the
Banking sector
literature of bank risk management. Our model provides a comprehensive risk management framework
for bank executives, bank risk managers, the board members of banks, central banks and the authorities
responsible for financial sector stability.
© 2021 Published by Elsevier Inc. on behalf of Board of Trustees of the University of Illinois.

1. Introduction and background to the study
In response to the growing expectation for effective risk man-
agement permeating the entire aspect of the operations of firms,
Enterprise Risk Management (ERM) has received unprecedented
international attention in recent years; resulting in many leading
organisations abandoning their traditional ‘silo-based’ risk man-
agement for ERM (Beasley, Clune, & Hermanson, 2006). This is
supported by Arena et al. (2010), who noted that interest in the dis-
cipline of ERM has grown rapidly over the last two decades, with
regulators, professional associations and even ratings agencies call-
ing for its adoption, alongside making meaningful contributions to
its development.
∗ Corresponding author.
E-mail addresses: mukhtar.adam@zenithbank.com (M. Adam),
a.soliman@leedsbeckett.ac.uk (Alaa.M. Soliman), M.mahtab@leedsbeckett.ac.uk
(N. Mahtab).
A reflection of the growing interest in ERM includes the issuance
of regulations on a global level; for example, the COSO Framework
on ERM issued by the Committee of Sponsoring Organisations of
the Treadway Commission (COSO1 ) and the Basel II framework2
1
The Committee of Sponsoring Organizations of the Treadway Commission
(COSO) is a major contributor and promoter of the discipline of ERM. It was
established in 1985 by five U.S. based private sector organizations (the American
Accounting Association - AAA, the American Institute of Certified Public Accountants
- AICPA, Financial Executives International -FEI, The Institute of Internal Auditors -
IIA, and the National Association of Accountants (now the Institute of Management
Accountants) - IMA) to provide thought leadership to the interrelated discipline of
enterprise risk management (ERM), internal control, and fraud deterrence. In fur-
therance of this vision, COSO issued the Enterprise Risk Management – Integrated
Framework in 2004, with subsequent updates as well as publications of thought
papers relating to ERM (Coso.org, 2013).
2
The Bank for International Settlements (BIS) through the Basel Committee on
Banking Supervision (BCBS) has for more than two decades been at the forefront of
issuing guidelines for the supervision and regulation of the global banking industry.
Within this period, BCBS has issued three main regulatory frameworks known as
Basel I, Basel II and Basel with successive frameworks attempting to address the
limitations of previous ones. The main focuses of the Basel frameworks have been

https://doi.org/10.1016/j.qref.2021.01.002
1062-9769/© 2021 Published by Elsevier Inc. on behalf of Board of Trustees of the University of Illinois.

Please cite this article as: Adam, M., et al, Measuring enterprise risk management implementation: A multifaceted approach for the
banking sector, The Quarterly Review of Economics and Finance, https://doi.org/10.1016/j.qref.2021.01.002
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M. Adam et al.
issued by the Basel Committee on Banking Supervision, both in
2004. At a national level, laws were issued in the US, such as Section
404 of the Sarbanes-Oxley Act of 2002 and the Emergency Eco-
nomic Stabilisation Act of 2008 (Desender, 2007; McShane, Nair, &
Rustambekov, 2011). The Central Bank of Nigeria (CBN) issued the
Supervisory Framework for Banks and Other Financial Institutions
and the New Regulatory Framework for Prudential Supervision of
Nigerian Banking System in 2008 and 2012 respectively. All these
regulations are geared towards managing risk in a more compre-
hensive, consolidated and coordinated manner, which is the core
of ERM.
Further evidence of the growing interest in ERM is the positive
response received by Standards and Poor’s (a foremost US rating
agency) when the agency proposed the introduction of ERM anal-
ysis into its corporate credit rating process (Standard and Poor’s,
2007). The increasing rate of adoption and implementation of ERM
among firms in different countries and sectors buttresses the fact
that interest in ERM is a growing phenomenon. For example, a
2008 survey conducted by Deloitte on 151 firms (North America
-56, South America -24, Europe-68 and others- 3) found a growing
interest in ERM, with the majority of respondents (64 % in Europe
and 62 % in North America) indicating that their interest in ERM was
higher than the year before the survey (Deloitte, 2008). A study by
Baxter et al. (2013), conducted on 165 U.S. firms in the banking
and insurance industry, noted that 25 % of the sampled firms had
a strong or excellent ERM rating assigned by Standards and Poor’s,
indicating the level of advancement these firms have achieved in
their ERM adoption processes. Furthermore, the study by Beasley,
Clune, and Hermanson (2005), conducted on 123 firms selected
globally, found that 50 % of the firms in the sample had either fully
or partially implemented ERM, while 35 % had not made a decision
to implement ERM or had no plans to implement ERM.
The increasing rate of ERM adoption by firms has been equally
met by a growing interest among academics in assessing the impact
of ERM adoption (Hoyt & Liebenberg, 2010). However, the diffi-
culty in developing a valid and reliable measure of ERM construct
has presented a major problem for researchers in this area (Eckles,
Hoyt, & Miller, 2011; Hoyt & Liebenberg, 2010; McShane et al.,
2011). This challenge has resulted in alternative basis for mea-
suring ERM being adopted by researchers, leading to varying and
sometimes contradictory findings and conclusions. It is important
to note that, while some researchers used one-off signals (CRO
appointments) as an ERM measure, others modelled the ERM index
based on the components of selected ERM frameworks and oth-
ers adopted ERM indices provided by rating agencies. While some
methods used to measure ERM are purely qualitative, others are
quantitative and some are a combination of both, in varying pro-
portions.
The objective of this study is to present a model for measuring
ERM for the banking sector which captures, as much as possible, the
peculiarities of the banking sector and reflects the comprehensive
and pervasive nature of ERM. Such a model will provide a necessary
platform for future researchers to develop a more comprehensive
model to determine ERM adoption or implementation, which will
contribute greatly to improving the quality of research in this area.
This study seeks to answer the following research questions:
a Are the measures of ERM used in ERM related research compre-
hensive enough to reflect the depth and pervasiveness of ERM?
b Does the banking sector require special models for the effective
measurement of ERM?
on measuring the adequacy of banks’ capital, otherwise known as Capital Adequacy
Ratio (CAR).
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c How do the components of an ERM-model interact with the
components of an integrated performance assessment model
(CAMELS) and what key ratios or qualitative measures does such
an interaction produce?
d Can an index derived from the interaction of an ERM-model and
a CAMELS model be used as a measure for ERM?
The first part of this study presents the conceptual frame-
work for our ERM index model. We go on to provide a summary
of literature relating to the ERM measures used in this research
area, as well as the methodologies used to determine the mea-
sures, noting the strengths and limitations of the measures and
the methodologies used in determining them. We then present our
multifaceted methodology for determining ERM measures, high-
lighting the strengths of the two main models (ERM-themes and
CAMELS components) on which the current model is based. We
further illustrate how an ERM measure can be obtained using the
model as well as providing some insight into the nature of informa-
tion required. We conclude by summarising the various sections of
the paper, with particular emphasis on the significant contributions
of the study and recommendations for future research.
1.1. Conceptual framework for ERM index model
The foundation of this study is our proposition that the compre-
hensive and pervasive nature of ERM requires that any measure
used as a proxy to ERM must consider, as much as practicable,
the critical aspects of a firm’s operations that are affected by
ERM implementation. Based on our review of related studies on
ERM, we noted the proxies used by different researchers as ERM
measures were either a one-off event (CRO appointments), index
modelled from the response of a survey or index modelled from the
components of selected ERM models. We argue that the current
methodologies used to determine ERM measures lack the depth
and breadth to match the comprehensiveness and pervasiveness
of ERM. We therefore argue for a model capable of capturing all the
components of ERM as well as the critical performance measures
of firms. In this regard, we adopted an ERM model tailored for the
banking sector and the CAMELS model used for assessing banks
as two comprehensive models able to drive a robust methodol-
ogy for determining an ERM measure for the banking sector. The
conceptual framework for the model is presented in Fig. 1.
The conceptual model presented in Fig. 1 indicates that ERM-
themes interact with components of the CAMELS model, producing
prudential indicators which are mainly quantitative in nature, with
certain aspects of the ERM-themes on their own producing qualita-
tive measures. Together, the quantitative and qualitative measures
produced by the interaction of ERM-themes and the components
of CAMELS produce an overall ERM index.
2. Literature review
Enterprise Risk Management (ERM) is viewed as a paradigm
shift away from a ‘silo-based’ approach to managing risk, towards
a holistic approach to managing risk (Gordon, Loeba, & Tseng,
2009). When implemented, it is anticipated that ERM will assist
firms in keeping their risks within a defined risk tolerance limit,
as well as helping them to improve their performance and market
values (Committee of Sponsoring Organisations of the Treadway
Commission, 2004; Beasley, Pagach, & Warr, 2008; Gordon et al.,
2009; Hoyt & Liebenberg, 2010; Arena, Arnaboldi, & Azzone, 2010;
Pagach & Warr, 2010, 2011). The theoretical expectation that adopt-
ing ERM help firms to improve their performance has, among
other factors, motivated several empirical investigations into the
effects of ERM on the performance of firms, resulting in differ-
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M. Adam et al.
Fig. 1. Diagrammatic representation of the conceptual framework of our ERM model.
ent and sometimes contradictory findings and conclusions. While
some studies found no evidence of any relationship between ERM
and firm performance, other studies found a positive relationship
between ERM implementation or adoption and firm performance.
Among the group of studies that found no evidence that ERM
affects the performance of firms are; Alawattegama (2018); Beasley
et al. (2008); Pagach and Warr (2007, 2010, 2011); Quon, Zeghal,
and Maingot (2012); Ramlee and Ahmad (2015) and González,
Santomil, and Herrera (2020). Empirical investigations finding a
positive relationship between ERM implementation or adoption
and firm performance include; Andersen (2008); Baxter, Bedard,
Hoitash, and Yezegel (2013); Eckles et al. (2011); Gates, Nicolas, and
Walker (2012); Gordon et al. (2009); Hoyt and Liebenberg (2010);
McShane et al. (2011); Obalola, Akpan, and Abass (2014); Ping and
Muthuveloo (2015) and Ai, Bajtelsmit, and Wang (2018).
Alongside a growing interest in research in the area of ERM,
the difficulty in developing a valid and reliable measure of ERM
construct has been the principal challenge faced by researchers
(Eckles et al., 2011; Hoyt & Liebenberg, 2010; McShane et al., 2011).
This partly explains why different empirical studies have produced
varying and sometimes contradictory findings. In response to this
challenge, researchers have used different measures or signals to
calculate ERM adoption or implementation.
We categorised researchers into three groups according to the
source and type of information they use to measure ERM adoption
or implementation.
2.1. Presence of key risk officers or functions as proxy to ERM
The first group among these three categories contains
researchers that used the presence of key risk officers or risk func-
tions as a signal for ERM adoption. The common measure among
this group is to use the appointment or presence of a Chief Risk
Officer (CRO) as a signal for ERM adoption by firms. Some of the
works that fall in this category include; Beasley et al. (2008); Hoyt
and Liebenberg (2010); Pagach and Warr (2007, 2010) and Paape
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The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx
and Spekle (2012). In explaining the logic of associating the hiring
of CROs to ERM adoption, Beasley et al. (2008) argued that firms
appoint CROs for three possible reasons:
• To fill a newly created CRO position in the organisational struc-
ture, making it reasonable to assume that either the firm is about
to adopt ERM or has started paying more attention to ERM.
• The need to replace an existing CRO, which could also indicate
that ERM has been adopted or is already in place.
• A title change to CRO to properly reflect the officer’s responsibil-
ity, which also signifies the existence of ERM.
Arguing the rational for associating CRO appointment with ERM
implementation, Pagach and Warr (2010) posited that due to its
nature, scope and impact, an ERM program requires strong sup-
port from and the involvement of senior management. This partly
supports the notion that the hiring of a CRO usually coincides with
the adoption of ERM. Further corroborations of associating CRO
appointment to ERM adoption are found in the empirical studies
by Beasley et al. (2005), which found that the presence of a CRO is
associated with a more advanced stage of ERM adoption, and Paape
and Spekle (2012) which found that publicly traded firms with a
CRO and an Audit Committee have a more mature ERM in place.
Florio and Leoni (2017) also used the presence of a CRO, and other
risk functions, as a proxy to ERM in their investigation of the impact
of ERM on the performance of firms. It is worth noting that using
the announcement or presence of a CRO as a proxy to ERM signifies
ERM adoption without providing any information on the extent of
implementation, the conformity of the programme to an acceptable
ERM framework or global best practices or the level of sophistica-
tion of a firm’s ERM programme (Beasley et al., 2008; Florio & Leoni,
2017; McShane, 2018; McShane et al., 2011; Pagach & Warr, 2010).
Such serious limitations associated with using the announcement
of hiring a CRO, or the presence of a CRO role within a firm’s struc-
ture as proxy to ERM, has necessitated the exploration of other
more comprehensive and all-encompassing ERM measures.
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2.2. Using survey response to determine ERM adoption or
implementation
The second group of researchers are those using surveys to
determine if a firm has adopted ERM and the extent to which firms
indicate they have adopted ERM. Works that fall within this cat-
egory include Beasley et al. (2006) and Gates et al. (2012). In the
study by Beasley et al. (2006), which empirically examined the
overall impact of ERM adoption on the internal audit function, the
elements of ERM identified by COSO were used to design the sur-
vey questionnaire. The researchers noted that the relatively lengthy
questionnaire allowed them to gather a great deal of information
about firms’ ERM efforts and was based on the key components
and themes of ERM as identified by COSO. The responses pro-
vided on each of the components were used to determine the
extent of ERM implementation for the various firms. In the work
of Gates et al. (2012), which studied the practical value of ERM by
surveying corporate ERM practices, the researchers designed sur-
vey questionnaires based on the eight interrelated components of
ERM identified by COSO. The survey questionnaire was designed
by adopting each of the eight interrelated components as themes,
using multiple measures for each component. The responses were
used to determine a measure for ERM adoption or implementation.
We note that the comprehensive and technical nature of ERM
requires the commitment of respondents who are technically
versed and deeply involved in the ERM process of a firm, in order
to complete a survey questionnaire that will provide the appro-
priate information needed to measure the ERM implementation of
a firm. Therefore, the number of possible respondents from any
firm is limited and is bound to be at top management levels, which
makes it more difficult to receive a comprehensive response. These
factors reduce the quantity and quality of information that can be
obtained from a survey process to facilitate the construction of an
appropriate ERM measure.
2.3. Modelling ERM index based on firm specific information
The third group of researchers among the three categories
are those using firm, specific information, public or non-public,
to determine the adoption and level of ERM implementation by
firms. Works within this category include Gordon et al. (2009)
and Alawattegama (2018), who developed a model for an ERM
index and used the financial information of firms to determine
ERM implementation. In their studies, both Gordon et al. (2009)
and Alawattegama (2018) used the COSO framework as a basis for
determining the adoption of ERM by firms. Gordon et al. (2009)
modelled an ERM index (ERMI) around COSO’s four objectives
of ERM, namely, strategy, operations, reporting and compliance.
Alawattegama (2018), on the other hand, modelled an ERM index
using COSO’s eight interrelated components of ERM, namely, objec-
tive settings, event identification, risk assessment, risk response,
information and communication, control activities and monitoring.
Using such models as indicators of ERM implies that the effec-
tiveness of a firm’s ERM is based on its ability to fit within the
framework of COSO.
A sub-group within this third category consists of researchers
who rely on externally produced ERM ratings, such as those pro-
vided by Standard and Poor’s ratings on specific firms. Among this
group are McShane et al. (2011) and Baxter et al. (2013). In their
study of the relationship between ERM implementation and firm
value, McShane et al. (2011) used the ERM ratings assigned to
selected firms by S&P to indicate ERM adoption and the extent of
implementation. In adopting the S&P-ERM index, the researchers
noted that such an index provided information on the extent
and level of sophistication of a firm’s ERM adoption and imple-
mentation programme. The researchers further argued that using
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The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx
the S&P-ERM index enabled ERM implementation to be repre-
sented in its most comprehensive form, since the index is assigned
after a thorough review of a firm’s risk management culture, sys-
tems, processes and practices. Baxter et al. (2013) investigated
the determinants of ERM programme quality and the association
of ERM quality with firm performance and value, using the S&P-
ERM index as a proxy to ERM. The researchers argued that using
the S&P-ERM index as a proxy for ERM addresses the measure-
ment problems associated with ERM research from an independent
and professional perspective. In their view, the comprehensive and
sophisticated nature of the methodology used by the rating agency,
as well as its access to non-public information about the ERM pro-
cess of firms, enabled S&P to arrive at an ERM index that gives a
true reflection of a firm’s ERM status.
Despite the seeming strength in the ERM measures used by
the third group, modelling ERM based on detailed analysis of the
specific information of firms, we note certain important limita-
tions associated with the information used and the methodologies
adopted. In the first instance, ERM index developed by individ-
ual researchers, such as Gordon et al. (2009) and Alawattegama
(2018), relied on a small amount of selected qualitative and quanti-
tative information obtained from the annual reports and operating
procedures of firms. This does not address the need for a more
comprehensive assessment of the implementation of ERM by
firms which captures information that matches the comprehen-
sive nature of ERM itself. In addition, using the COSO-ERM model
to drive ERM ratings has been criticised on the grounds that the
assigned ERM index can be largely influenced by researcher sub-
jectivity. Also, using only one ERM model for such an exercise could
result in the assignment of a low ERM index to firms that use ERM
models other than COSO’s or the one adopted by the researcher
(Tekathen & Dechow, 2013).
Using the S&P-ERM index as proxy to ERM implementation has
limitations in the sense that the index is only available for spe-
cific industries, for example, financial services and countries with
mainly developed economies (Baxter et al., 2013; McShane et al.,
2011). McShane et al. (2011) further argued that rating agencies
have been criticised for assigning ratings that are distorted by
their business relationship with clients, which casts some doubt
on the credibility of the S&P-ERM index assigned to firms. This
credibility issue is further compounded by the fact that rating agen-
cies frequently review ratings assigned to firms, either upwards or
downwards, and if the ERM index is driven by risk management
culture, systems, processes and practices among others, these fac-
tors are not expected to change in the frequency of upwards or
downward review of ratings (McShane et al., 2011). It is further
argued that, although rating agencies publish their rating method-
ologies, issues around client confidentiality do not allow them to
make public enough information to enable an independent valida-
tion of their ratings, making it difficult for ratings to be modified
where necessary (Baxter et al., 2013; McShane et al., 2011). A sum-
mary of ERM measures used by selected researchers are presented
in Table1, below.
3. Multifaceted approach to measure ERM
It is clear from the discussion above that there are serious lim-
itations associated with the basis of measuring ERM adoption or
implementation as currently used in this research area. Such limi-
tations could significantly affect the ERM measure obtained, as well
as the findings and conclusions derived from using such measures.
In a more recent study, González et al. (2020) considered the effects
of ERM on the risk and performance of Spanish listed companies.
These researchers made a good attempt at using a multifaceted
measure of ERM, using the presence of a CRO, a Risk Committee,
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M. Adam et al.
Table 1
Summary of prudential ratios used as proxy for ‘CAMELS’ components.
CAMELS component Mishra et al. (2012) Kabir and Dey (2012)
Capital adequacy CAR CAR, LR, ROE, NWP
Asset quality NPL PCL
Management soundness MVTE, LDRBPE, PPE IPE, EPE
Earnings and profitability NIM, NPM, IDR, EPS
Liquidity LATA, LATD LATA, LATD EATD
Sensitivity to market risk No measure was used
Ratio definitions and basis of computation as follow:
1. CAR: Capital adequacy ratio = Risk weighted asset/Qualifying capital.
2. DER/LR: Debt-to-equity ratio, Leverage Ratio = Total debt/Total equity.
3. TCTA: Total capital to total assets = Total capital/Total assets.
4. ROE: Return on equity = Profit after tax/Total equity.
5. NWP: Net worth protection = Total equity/Non-performing loans.
6. LTA: Loans to total assets = Total loans/Total assets.
7. GSTI: Government securities to total investment = Total investment in government securities/Total investments.
8. NPL/PCL: Non-performing loan ratio/Percentage of classified loans = Total non-performing loans/Total gross loans.
some components of COSO and quantitative measures, for example,
hedging instruments for exchange rates, interest rates and credit
risk. This indicates the growing interest in the search for ERM mea-
sures that truly reflect the pervasiveness and complexities of ERM.
We note, however, that this research gap remains unaddressed.
To bridge this significant methodological gap, we propose a more
robust basis of determining ERM measures for the banking sector;
driven by the various components of ERM through key performance
measures that are products of ERM implementation. In this regard,
we adopt the concept of interaction of two models to measure ERM.
The first of the two models is an ERM model for the banking sector
and the second is an integrated performance measurement model.
In their study, Florio and Leoni (2017) noted that the adoption of
quantitative methods for risk assessment, in addition to qualitative
methods, provided more convincing results and called on future
researchers to adopt a more comprehensive approach to measuring
the sophistication of ERM, rather than just single elements.
In this study, as our first model, we adopt an ERM model that
has been designed specifically for the banking sector. The reason
for adopting such an ERM model (instead of existing models, such
as the COSO-ERM model) is that a model specifically designed for
the banking sector will elicit more critical banking performance
measures than a general ERM model. Secondly, for an efficient
interaction of the two models to produce one ERM measure, both
models must be compatible, driving and measuring the same sets
of objectives.
The second model adopted is the ‘CAMELS’ model for assess-
ing the soundness of banks. This model was first proposed in 1998
by the Basel Committee on Banking Supervision (BCBS) of the
Bank for International Settlements (BIS) as a five-component model
‘CAMEL”, updated with the sixth component for what we currently
have as ‘CAMELS’ (Dash & Das, 2013). The name of the model is a
simple acronym of all the components of the model, namely, capital,
asset quality, management soundness, earnings quality and sensi-
tivity to market risk. According to BCBS, the essence of the model
is to provide financial institutions with a tailored model that will
assist them in monitoring and managing the most important risk
they face, at the same time, measuring their performance on those
indicators.
3.1. ERM model for the banking sector
We adopted an ERM model designed specifically to meet the
needs of the banking sector. The five major themes of the banking-
5
The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx
Mishra et al. (2012) Ongore and Kusa (2013) Ferrouhi (2014)
CAR, DER, LTA TCTA DER
GSTI
NNPL, TITA, NNPLTA, NPL LLPTL
PCNNPL
LDR, PPE, TRTP ROE
BPE, ROE
OPTA, NPTA, IITA, NIM, ROA, ROE ROA
NIMTA
LATA, LATD, LATDD, LDR DTA
ASTA
sector-ERM-model, namely, risk organisation and governance, risk
insight and strategy, risk process and decisions, operating and regu-
latory environments and risk monitoring and reporting, represent
the main drivers of ERM for the banking sector. Each of the five
major ERM themes has sub-themes that provide guidance on what
each entails and details of activities required in meeting their ERM
objectives, as depicted in Fig. 1. At the bottom of the sub-themes is
a two directional arrow to indicate a continuous interaction among
the components of the various ERM themes. This represents the
idea that ERM is not a one-off activity, it is a continuous process
that is monitored, reviewed and updated where necessary (Fig. 2).
Although the five themes-based banking sector ERM model is
specifically designed to meet the peculiarities of the banking sector,
the model equally captures the key components of existing ERM
models, making it adaptable for firms in other sectors.
3.2. Usage of the CAMELS model to assess performance banks
Due to the high level of interconnectedness of the financial
sector, banks and other firms integrated into the financial system
face multiple risks requiring macroprudential rules and polices to
facilitate risk measurement for effective management (Luu Duc
Huynh, 2019). According to Evans, Leone, Gill, and Hilbers (2000),
the ‘CAMELS’ model is commonly used among bank operators,
financial sector regulators and researchers to assess the ‘health’
of banks, using important prudential ratios and measures. In the
opinion of Misra and Aspal (2013), the ‘CAMELS’ is a ratio-based
model that has been of immense benefit to bank regulators and
examiners, providing them with objective rating criteria for assess-
ing the ‘healthiness’ of banks. In recent times, researchers have
used prudential indicators3 driven by the ‘CAMELS’ model to assess
the performance and soundness of banks in different countries.
For example, Mishra, Harsha, Anand, and Dhruva (2012) analysed
the performance of different Indian banks using prudential ratios
driven by the ‘CAMELS’ model, where different components of
the model were represented by different prudential ratios or per-
formance measures. The study by Kabir and Dey (2012), which
3
The IMF, in its September 2000 publication entitled ‘New tools for assessing
financial system soundness’, defined macroprudential indicators as measures of the
health and stability of the financial system, which help countries to assess their
banking systems’ vulnerability to crisis. The IMF noted that, in recent years, a lot of
work has been done on such indicators as part of efforts to strengthen the interna-
tional financial architecture.
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Fig. 2. ERM MODEL FOR THE NIGERIAN BANKING INDUSTRY.
examined the comparative performance of two leading private sec-
tor commercial banks in Bangladesh by ranking the banks in terms
of their prudential and other performance ratios, used the CAMELS
model to drive the relevant ratios and performance. In the study by
Misra and Aspal (2013), which also adopted the ‘CAMELS’ model
as the framework to evaluate the performance and soundness of a
group of banks, the researchers used different prudential ratios to
represent various components of the model. The study by Ongore
and Kusa (2013) on the financial performance of commercial banks
in Kenya, utilised the ‘CAMELS’ model to assess the financial health
of selected banks. As with other related studies, the researchers
used various prudential and performance measures as a proxy for
the components of the model. Ferrouhi (2014) examined the per-
6
The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx
formance of major Moroccan financial institutions for the period
2001–2011, using ‘CAMELS’ model as the main framework for the
performance assessment of banks. In their study, Zedan and Daas
(2017) assessed the performance and financial health of Palestinian
commercial banks in 2015 using the CAMELS model, noting how
central the model is in assessing the health of banks. In a more
recent study, Nguyen, Nguyen, and Huong Thanh Pham (2020)
investigated the impact of the CAMELS components on the finan-
cial performance of commercial banks in Vietnam and found the
components of the model to performance of the banks.
It is clear from the above that the use of the ‘CAMELS’ model is
common among researchers in the field of bank performance mea-
surement, although a wide range of prudential ratios have been
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Table 2
ERM – CAMELS MATRIX.

ERM – THEMES Financial/prudential

performance measures
Risk organisation & Risk insight and Risk process and Operating and Risk monitoring and
governance strategy decisions regulatory reporting
environment

Capital adequacy • Capital structure • Investment • Approval of capital • Product • Effective oversight • Capital adequacy
• Raising capital appraisals projects and capital development of board and board ratio
COMPONENTS OF • Dividend pay-out • Capital allocation commitments • Expansion into level committees • Debt-to- equity PERFORMANCE
CAMELS-MODEL • Profit retention • Capital • Acquisition and new frontiers • Financial reporting ratio MEAURES
• Growth strategy expenditure deployment of • Regulatory framework and • Net interest margin

ARTICLE IN PRESS
• Reputational risk • Asset / technology assets / technology compliance risk standards, and • Dividend per share
management replacement strategy accounting policies • Market share
strategy • Communication • Dividend per share
• Stress testing of with external • Customer service
capital stakeholders such • ROAA, ROAE, EPS
• Creation of capital as investors
buffers or
contingency plans

Asset quality • Risk acceptance • Credit analysis and • Risk weighted • Industry and • Loan monitoring • Non-performing
criteria rating of credit assets and capital sectorial limit • Review of early loan ratio
7

• Loan concentration customers adequacy ratio • Industry wide warning signal, • Cost of risk
• Single obligor limit • Industry analysis • Counter party information impairment • Sector
• Related party and policy on ratings and margin sharing to reduce triggers and concentration
exposure exposure to covers default forecasting • Foreign-currency-
specific industries • Collateral • Compliance with probability of denominate
• Geographic valuations and regulatory default loans
diversification documentation directives on risk • Loan recovery and • Public sector loans
analysis and policy Continuous update assets collateral • Related party loans

The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx

on geographic of credit realisation
exposure documentation

Management • Board composition • Training and • Assessment of skill • Continuous • Continuous • Income / expense
soundness • Appointment of exposure to best gap education / reinforcement of per employee
senior risk officers risk management • Deployment of improvement risk management • Profit per
practices and tools tools and training programs philosophy and employee
• Composition of facilities or new • Continuous risk culture • Training expenses
various hiring to breach awareness • Effective ratio
management the gap programs communication of • Market share
committee with risk management • ROAA, ROAE, EPS
clear mandates efforts to
stakeholders and
seeking feedback
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Table 2 (Continued)

ERM – THEMES Financial/prudential

performance measures
Risk organisation & Risk insight and Risk process and Operating and Risk monitoring and
governance strategy decisions regulatory reporting
environment

Earnings & • Budget approval • Cost of funds • Impairment • Peer review and • Provision for • Gross interest
profitability • Periodic • Lending rates and charges bench marking impaired loans margin
performance other pricing • Review and • Industry analysis • Loan recovery, • Net interest margin
review adjustments of and positioning collateral • Non-interest

ARTICLE IN PRESS
rates and other • Compliance with foreclosure and income
prices regulations on other work-out • Profit before tax
• Budget / actual bank charges and plans • Profit after tax
performance customer • Impairment
review protection charges
• Cost monitoring • cost-to-income-
and control ratio
• ROAA, ROAE, EPS

Liquidity • Funding sources • Analysis of • Loan disbursement • Review of • Loan work-out • Liquidity ratio
and tenure duration gap of • Value of monetary policy • Sale or • Loan to deposit
8

• Deposit assets and liability undisbursed and positioning securitisation of ratio

mobilisation • Policy on commitments • Assessment of loan • Liquid assets to
strategy acceptable • Liquidity industry wide total assets
duration gap and management and liquidity forecast • Liquid assets to
limit creation of • Creating of demand deposits
liquidity buffers liquidity buffers for • Maturity profile of
• Stress test of anticipated assets and
liquidity ratio and industry liquidity liabilities

The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx

contingency plan squeeze

Sensitivity to market • Investment and • Interest rate gap • Deal closure and • Assessment of • Reporting and • Price per share
risk underwriting and re-pricing of compliance with counterparty risk disclosure of • Cost of funds
policy assets and deal terms and positioning market risk in line • Net interest margin
• Response to liabilities • Review of current • Compliance with with regulations • Foreign currency
changes in • Foreign currency obligations and regulatory ratios and acceptable gap
macroeconomic gap and type, profitability of such as Net Open standards such as • Net open position
indices number and value existing deals and Position (NOP) IFRS 7 • Interest rate
of acceptable determination of repricing gap
foreign currency possible actions
exposure
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M. Adam et al.
identified and used to represent the various components of the
model. Also evident from the above discussion is the critical role
prudential ratios driven from the CAMELS model play in the assess-
ment of banks. A summary of prudential ratios used by selected
researchers for the various components of the CAMELS model are
presented in Table 2 below.
3.3. Integration of ERM themes with CAMELS components
In carrying this novel integration of these two important models
(ERM and CAMELS), we argue that the effects of a bank undertaking
the activities relating to each of the ERM themes become mani-
fest in certain financial and non-financial performance indicators
or measures. Given the comprehensive nature of the ‘CAMELS’ inte-
grated model in assessing the performance and soundness of banks,
we adopted it as a performance assessment model for the banking
sector and integrated it with the ERM-model for the banking model.
This produced a matrix comprised of our five ERM themes on the
horizontal side and the six components of ‘CAMELS’ on the verti-
cal side. On the matrix, the points of intersection of an ERM theme
and a component of the ‘CAMELS’ model represents a set of out-
comes resulting from carrying out ERM related activities, with such
outcomes also translating into prudential indicators representing
the CAMELS component. Finally, for each cell of the matrix, we
identified important financial performance measures in the form
of prudential indicators and non-financial performance measures
in the form of qualitative measures, forming the basis of deter-
mining our ERM index. The ERM-CAMELS matrix is presented in
Table 3.
Having drawn up a matrix of ERM themes and ‘CAMELS’ compo-
nents, we identified certain activities in the ERM implementation
that produced results able to be matched with various ‘CAMELS’
components at different levels. A complete match of the two models
was not anticipated, however, a significant portion of the two mod-
els was successfully mapped and used to drive key outcomes that
produced important prudential and performance ratios. To facili-
tate the process of developing an ERM index, we identified relevant
quantitative and qualitative prudential ratios and measures to rep-
resent each cell in the ERM-CAMELS matrix presented in Table 3.
The result is presented in Table 4.
3.4. ERM index model
Our model for determination of ERM index is as follows:

18 
35
ERMI = Quantitativek / (11 − 7) + Qualitativek /3(35)
k=1 k=1
Where
ERMI = ERM index;

18
quantitativek = Total sum of all 18 quantitative measures; and
k=1

35
Qualitative = Total scoreof all 35 qualitative measures
k=1
Our ERM index model combines both quantitative and qual-
itative measures consistent with the matrix of ratios and risk
measures presented in Table 4. Besides the strength of combining
two comprehensive models to produce these ratios and measures,
the model also provides an avenue for all ERM activities (both
quantitative and qualitative) to be captured. To ensure that both
The Quarterly Review of Economics and Finance xxx (xxxx) xxx–xxx
quantitative and qualitative measures contribute in the same pro-
portion to the overall ERM index, certain adjustments were made
to ensure that the maximum possible value a bank can score is 1 for
quantitative measure and 1 for qualitative measure. By so doing the
model produces a possible maximum overall ERM score of 2, with
each of the measures (quantitative and qualitative) contributing in
the same proportion.
3.4.1. Adjustment to the sum of quantitative ratios
Each quantitative measure represents a ratio of either two bal-
ance sheet items or an income statement item and a balance sheet
item. Generally, the highest value each ratio could assume is 1
or 100 %, although there some rare cases where certain ratios
give values above this threshold. For each quantitative ratio, we
assigned a maximum value of 1 and also assigned either a nega-
tive or positive sign to reflect the expected impact of the ratio on
a bank. For ratios that are expected to reflect weak risk manage-
ment if their values are high, we assigned a maximum of negative
1. For ratios that reflect strong risk management if their values
are high, we assigned a maximum value of positive 1, as shown
in Table 5.
From Table 5, we assigned positive 1 to eleven ratios and nega-
tive 1 to seven ratios, which produced a possible maximum positive
value of four. To obtain our ERM quantitative measure, we divided
the sum of all eighteen ratios by the possible net maximum value
of four, which is mathematically expressed as:

18
Quantitativek / (11 − 7) (2)
k=1
3.4.2. Adjustment to the sum of qualitative ratios
For the qualitative measures, we assessed banks based on six
major headings, namely, risk organisation, board effectiveness,
audit committee oversight, audit quality, quality of internal audit
and quality of management discussions in annual reports. In all,
the six major areas of qualitative assessment had a total of thirty-
five (35) questions that are rated based on information provided
in the annual reports of banks and other publicly available infor-
mation. Each qualitative measure is scored from a scale of 1–3,
which implies that the highest total score for all 35 qualitative mea-
sures is 3 multiplied by 35. The sum of the qualitative measures
is divided by this factor (3*35), which gives a possible maximum
qualitative score of 1. The adjustment is expressed mathematically
as:
(1) 
35
Qualitativek /3(35) (3)
k=1
4. Conclusions
In this study, we argue that the current methodologies used
to determine ERM measures have serious limitations in that
they are not sufficiently comprehensive to reflect the inclusive
and pervasive nature of ERM. This implies that the measures
assigned currently to ERM do not necessarily reflect its concept.
We addressed this methodological gap by proposing a measuring
model that combines various ERM themes with the components of
an integrated performance assessment model (CAMELS).
The combination of an ERM model and the CAMELS model in
a matrix to determine the qualitative and quantitative measure
of risk is very novel in the literature of risk management. We
are not aware of any studies that have adopted this approach.
The significance of this approach of determining the interaction
between ERM model and the CAMELS performance assessment
9
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Table 3
Ratios and risk measures derived from ERM – CAMELS matrix.

Quantitative measures:
1. CAR: Capital adequacy ratio = Risk weighted asset/Qualifying capital.
2. RPLA: Related party loans to loans = Related party loans/Total loans.
3. NPL: Non-performing loan ratio = Total non-performing loans/Total gross loans.
4. COR: Cost of risk = Loan provision expense/Gross loans.
5. LLR: Loan loss reserve/coverage ratio = Cumulative loan provision/Total non-performing loans.
6. HIE: Highest industry exposure.
7. LRR: Loan recovery ratio = Recovery/Total-non performing loans.
8. TETOE: Training expense to operating expense ratio = Total training expenses/total operating expenses.
9. FPPR: Fines and penalties paid to total revenue = Fines and penalties paid/Gross revenue.
10. PPE: Profit per employee = Total profit/Total number of employees.
11. ERR: Earnings retention ratio = Earnings retained/Total earnings available for distribution.
12. MSR: Market share of revenue = Firm gross revenue/Industry gross revenue.
13. LR: Liquidity ratio = Total liquid assets/total deposit.
14. LDR: Loan to deposit ration = Total loans/Total deposit.
15. EILR: Exposure to industry liquidity risk = Net exposure to the interbank market / Total industry interbank dealings.
16. DRG: Duration gap = Short term maturity of assets – short term maturity of liability.
17. FXG: Foreign currency gap = Foreign currency assets – foreign currency liabilities.
18. RPG: Re-pricing gap/interest rate = Rate sensitive asset – rate sensitive liabilities.
Qualitative measures:
1. BODE: Board of directors’ effectiveness.
2. BRMCE: Board risk management committee effectiveness.
3. ACE: Audit committee effectiveness.
4. CRO: Presence of CRO.
5. RMS: Risk management structure.
6. IAF: Internal audit function.
7. QMDFR: Quality of management discussion in financial reports.
8. ALCO: Presence of Assets/liabilities committee (ALCO).
9. AUQ: Audit quality.
10. MRMC: Presence of management risk management committee.
11. QRAD: Quality of financial reporting and additional voluntary disclosures.
10
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Table 4
Description and values that drive quantitative measures for ERM.

S/N Ratio acronym Ratio description Assigned value

1 CAR Capital adequacy ratio (CAR) 1

2 RPLL Total related party loans -to-total loans −1
3 NPL Non-performing loan -to- gross loan (NPL) −1
4 COR Cost of risk (provision charge / gross loans) −1
5 LLR Loan loss reserve ratio (loan loss reserve / GNPL) 1
6 HIE Highest industry exposure -to-Gross Loans −1
7 LRR Loan recovery ratio (loan recover / total non-performing loans) 1
8 TETOE Training expenses / total operating expense 1
9 FPPR Fines and penalties paid to gross revenue −1
10 PPE Profit per employee 1
11 ERR Earnings retention ratio 1
12 MSR Market share of revenue 1
13 LR Liquidity ratio 1
14 LDR Loan-to-deposit ratio (LDR) −1
15 EILR Exposure to industry liquidity risk (inter-bank exposure / total assets) −1
16 DRG One month duration gap -to-total assets 1
17 FXG Foreign currency gap-to-total assets 1
18 RPG Interest repricing gap -total assets 1
Total of positive ratios 11
Total of negative ratios 7
Net positive maximum value of ratios 4
Adjustment factor 4
Maximum value 1

Table 5
Qualitative outcomes of ERM used to determine ERM index.

Risk organisation
1 There is a formal risk management framework
2 Risk management philosophy clearly explained
3 There is an independent and well-staffed Risk Management Department
4 There is a risk management structure
5 Clearly explained terms of reference for risk management committees
6 The existence of ALCO and its terms of reference is clearly disclosed
7 Major risk management tools and strategies clearly explained
Board effectiveness and involvement in risk management process
8 Board responsibility and participation in risk management clearly stated
9 Clearly explained terms of reference for board risk management committee
10 Risk management structure clearly shows senior risk officers responsible for coordination of risk management activities
11 Publishes board evaluation / assessment at least annually
12 The non-executive directors more that executive directors
13 There at least two independent directors among the non-executive directors
14 Total stock holdings of directors less than 10 %
15 Do the board and all board committees meet at least once in a quarter?
16 All board members punctual at board meetings
17 The CEO different from the board chairmen
Audit committee oversight
18 There a clean audit committee report in the annual report
19 The audit committee meet at least once a quarter
20 The audit committee include representatives of shareholders
21 The audit committee chairperson a non-director
Audit quality
22 The audit opinion is a clean opinion
23 The auditor is one of the big four (PwC, KPMG, E&Y, and Delloitte)
24 The auditor’s current tenure is less than 10 years
25 Audit report does not indicate non-compliance with certain laws and regulations
26 The date accounts were approved by the directors and the audit report date are not more than 14 days apart
Internal audit
27 Roles of the internal audit department clearly explained
28 Extracts of the internal audit charter disclosed
29 Head of internal audit is senior enough to wield the power and authority required
30 Work of internal audit relied upon by external auditor
31 Work of internal audit reviewed and reported on by audit committee
Quality of management discussion in financial reports and timeliness of financial reporting
32 Management comments in financial report covers all significant aspects of operations and includes key ratios and performance measures
33 Additional reports provided aside the regulatory required annual reports
34 Investor conferences are held to provide more information and answer investors questions
35 Financial reports are published within 90 days after the reporting data
Total Score (QLTM)

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M. Adam et al.
model is to provide a comprehensive and robust basis for deter-
mining the level of ERM implantation by banks, using the
immediate output of ERM activities in the form of prudential
and non-quantitative measures. We argue that, by making such
a significant contribution to the literature on ERM and perfor-
mance assessment, we have set the pace for future researchers
to consider using more comprehensive performance assessment
models to determine ERM implementation, which will have a
significant impact on improving the quality of research in this
area.
For operators in the banking sector, such as risk officers and
board members, we recommend a more extensive analysis and
mapping of all risks, aligning them to key financial indicators and
relevant prudential ratios in order to obtain an appropriate risk
measure; for which our model serves as a guide. For central banks
and authorities responsible for financial sector stability, we rec-
ommend a review of risk management frameworks in light of the
need to have a risk measure which adequately captures all possible
risks. The measurement and assessment of the contagion effects of
banking sector risk, the impact of capital on bank performance and
the risk management of cryptocurrencies, are other critical ERM
components of banks not covered in this paper. Therefore, future
researchers could explore those banking sector risk management
research areas.
Declaration of Competing Interest
The authors certify that they have NO affiliations with or
involvement in any organization or entity with any financial
interest (such as honoraria; educational grants; participation in
speakers’ bureaus; membership, employment, consultancies, stock
ownership, or other equity interest; and expert testimony or
patent-licensing arrangements), or non-financial interest (such
as personal or professional relationships, affiliations, knowledge
or beliefs) in the subject matter or materials discussed in this
manuscript.
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