**Abstract**

Following the economic and financial crises, any activity involving internal controls, especially risk management, has been given more attention. With this study, we aim to contribute further to the existing literature on risk management by looking at practices adopted by financial services firms licenced in Europe with a Mediterranean connection. We used parts of a questionnaire adopted by two of the authors in another study on risk management practices adopted by Maltese financial services firms and sent it to prospective candidates who work closely within risk management, to collect our data. This resulted in 1635 participants. This data was used to (1) bring to light the mechanisms and strategies used in risk management by these organisations to maximise their opportunities, manage their risks, and maintain stability in their financials. Also, (2) we check if this is perceived as contributing to 'principled performance'. Finally, (3) we examine the extent to which risk management capabilities offer a competitive advantage to these firms. Our findings evidence that the objective by EMP and the EU, that is to ensure that members operate 'on the same level playing field' within risk management, in financial services of firms with a Euro-Mediterranean connection, has been achieved.

**Keywords:** risk management, financial services industry, risk management frameworks, Euro-Mediterranean, principled performance

### **JEL code**

G2, G3

#### **1. Introduction**

Although risks have been present since the beginning of mankind, explicit attention to them has differed over the passage of time. Early civilisations attributed unexpected events to the gods. This made it pointless for mankind to intervene and manage. This continued till today with some tribes in some parts of the world and was even the case until the middle ages when Christianity was strong in the current Western Europe. The word "risk" itself is derived from ancient Arabic word "rizq" and used till today in the Maltese Language, translated to mean prosperity granted

by God (Allah) to a person. However, during the Renaissance, in Europe this was given the meaning of an uncertain loss or danger Doff, [1].

Following the economic and financial crises of this century, any activity involving internal controls, especially risk management has been given more attention and importance. This, as noted in the World Economic Forum [2], was due mainly to the successful results of effective risk management during periods of global economic turbulence [8]. In fact, as Ghoshal [3] highlighted, one of the main objectives of any organisation is to manage their risk.

However, the treatment and understanding of risk and as a consequence its management, varies both in literature and in practice. Moreover, as March and Shapira [4] note, the strategic management field does not provide us with one specific accepted definition of risk and highlight that most managers view risk as a negative outcome.

Hillson [5] defines risk as an "uncertainty that matters because it can affect one or more objectives". Also, literature by [6], show that one needs to distinguish between the known, unknown and unknowable uncertainties before defining what constitutes a risk and as a consequence managing it under the risk management process. Unknowable uncertainty is when the missing information is unavailable to all known uncertainty is when the probability is an objective chance and is generally agreed upon and unknown uncertainty is when the probability may be or is known by somebody [6].

The strategy of any organisation has to deal with the alignment to its uncertain environment and to rebalance its strategic choices to determine the exposure to this uncertain environment, which impacts performance. To this effect various studies have focussed on understanding the risk management discipline and practices of firms in specific activities, areas and countries. Moreover, the effectiveness and efficiency of appropriate practices in risk management is critical for the continued existence, industry profitability and for the continual development and growth of the whole economy. It is imperative that all organisations adopt good quality practices and measures when managing risks [7].

With this study, we aim to contribute further to the existing literature on the risk management by looking at practices adopted by financial services firms licenced in Europe with a Mediterranean connection, specifically Cyprus, France, Italy, Spain, Croatia, Greece, and Slovenia extending and comparing to the work of Bezzina et al. [7] on Malta. We chose members, which although, have inherent country and cultural diversity and are joined by their geographical border with the Mediterranean Sea, aim for a level regulatory and economic playing field through their union in the European Union (EU) and the Euro-Mediterranean partnership [8].

When dealing with financial services firms, in the EU, this regulatory level playing field is much more pronounced, since financial firms are required to abide by common directives such as the Capital Requirement Directive (CRD) in banks and investment firms, Solvency II (SII) in Insurance firms and other soft laws. This is likely to make the sample more representative and the empirical results more generalisable. It will also shed light on whether European Union within the Euro-Mediterranean region and the Euro-Mediterranean Partnership (EMP), has brought these countries closer together in practices, specifically when dealing with risk and its management.

We use part of the questionnaire adopted by Bezzina et al. [9] in their paper on risk management practices adopted by Maltese financial services firms, to collect our data and (1) bring to light the mechanisms and strategies used in risk management by these organisations to maximise their opportunities, manage their risks,

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*Risk Management Practices Adopted by European Financial Firms with a Mediterranean…*

and maintain stability in their financials. Also, (2) we check if this is perceived as contributing to 'principled performance' (defined in the chapter in Section 2.2). Finally (3) we examine the extent to which risk management capabilities offer a

We can cite various studies dealing with risk management practices in different areas, industries, regions and countries. For example, a study on risk management practices carried out on the Ghanaian insurance industry by [7] revealed that companies insuring life, different from companies insuring non-life, have their risk appetite levels statements recorded. This enables the identification of those risks to on-board and those ones to transfer. Moreover, they exposed that the industry lacks adequate skilled personnel and risk management is reactive as a response to regulatory directives. Other surveys carried out about the UK insurance industry showed that the response by most insurance firms to risk management regulations was perfunctory, rather than being

Another study by [11] on risk management practices of German firms revealed that participants showed no difficulty in developing a risk management system and rated business survival as the top risk management goal. Moreover, they showed that respondents are more risk-neutral than risk-averse for financial risks, and that

Bankers operating in Barbados perceived risk management as critical to the performance of their banks; with operational risk, credit risk, country/sovereign risk, market risk and interest rate risk being their greatest exposures [12], while those operating in Bahrain show a clear understanding of both risk and risk management and have efficient risk assessment analysis, risk identification processes, credit risk analysis, risk monitoring and risk management practices with credit, liquidity and operational risk being the most prominent risks faced by both conventional and Islamic banks [13]. A study on Islamic banks in Pakistan showed that they are efficient in managing their risks. Revealing that the most influencing variables in the risk management process were that of understanding risk and risk management, risk monitoring and credit risk analysis [14]. On the other hand, Hassan [15], found that the Islamic banks in Brunei Darussalam consider foreign-exchange risk, followed by credit risk and then operating risk, as the 3 most important risks. He also noted that Islamic banks are very efficient mainly in risk identification, assessment and analysis. A further study by Sifumba et al. [16] revealed that manufacturing SMEs personnel in Cape Town are not aware of the elements that make risk management effective. While in Malta, Bezzina et al. [8], found that financial firms have a strong culture of efficient and effective risk management practices that add value and are linked to well-defined objectives with corporate social responsibility embedded within the organisations' risk management corporate strategies and corporate culture. Miloš Sprčić et al. [17], in a study on Croatian companies, find that the risk management system development is dependent only on value of the growth options

*DOI: http://dx.doi.org/10.5772/intechopen.80640*

competitive advantage to these firms.

seen as good business practice [10].

88 percent use derivatives.

and the size of the company.

**2.1 Risk management strategies and mechanisms**

Any organisation's strategy needs to deal with an uncertain environment. Therefore, organisational strategic choices will determine the organisation's

**2. Literature**

and maintain stability in their financials. Also, (2) we check if this is perceived as contributing to 'principled performance' (defined in the chapter in Section 2.2). Finally (3) we examine the extent to which risk management capabilities offer a competitive advantage to these firms.
