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Does risk culture matter? The relationship between risk culture indicators and stress test results
Journal of Risk Management in Financial Institutions,
9
(1),
71-84
(2016)
Abstract
A strong risk culture is generally thought to be valuable to an institution as it is said to strengthen the institution’s resilience. Can this claim be substantiated? In our research, we show that quantitative and qualitative risk culture indicators can be identified. Using a comprehensive dataset comprising 81 European banks, two scores are developed: a score for risk culture based on risk culture indicators, and a stress test score based on the 2014 ECB stress test outcome. Two hypotheses are tested: first, is there a relationship between the risk culture score and stress indicators (in this case, derived from the 2014 ECB stress test)? The results confirm that a relatively better stress test result corresponds to a better risk culture of a financial institution: two quantitative ratios, the leverage ratio and a variable quantifying adjustments derived from the AQR, entail significant explanatory power. Secondly, which individual risk culture indictors best explain the individual results of the ECB stress test? The qualitative factors showing a high significance are ‘governance’ and ‘other effects’, which include, for example, one-off effects.
Keywords: risk culture; stress testing; regulatory requirements; risk framework; financial institutions; AQR
The full article is available to subscribers to the journal.
Author's Biography
Sebastian Fritz-Morgenthal is an expert principal and member of the Risk, Finance & Regulation Practice at Bain & Company. He has 20 years of experience in top management risk and consulting functions at Deutsche Bank, West LB, HSH Nordbank, Booz & Co and the Frankfurt School of Finance & Management. The focus of his work is risk management (credit, market, operational, liquidity/treasury, reputational, enterprise wide), risk strategy, risk appetite, target operating model, client profitability, restructuring and crisis management, regulation implementation, quantitative methodologies and data analysis. Sebastian holds a diploma in physics from University of Hamburg and a PhD in physics from Goethe University Frankfurt. Sebastian served at the Board of Trustees of Global Association of Risk Professionals (GARP) from 2005 until 2012, was member of Institute of International Finance (IIIF), International Swaps and Derivatives Association (ISDA), Bundesverband deutscher Banken (BdB) and Bundesverband Öffentlicher Banken Deutschlands, (VoeB) working groups/ committees and is member of the Frankfurt Institute of Risk Management and Regulation (FIRM) since 2011. He is a frequent lecturer (Frankfurt School of Finance & Management, Cambridge University, London School of Economics, WHU Otto Beisheim School of Management, Goethe University), conference speaker (Risk Minds, Bundesbank, House of Finance, Frankfurt Institute for Risk Management and Regulation (FIRM), etc.) and author.
Julia Hellmuth is an account manager at SEB AG, client coverage — corporates, with focus on multinational corporations. She holds an MSc in finance with focus on risk management.
Natalie Packham is an assistant professor of quantitative finance at Frankfurt School of Finance & Management. She holds an MSc in computer science and a PhD in quantitative finance. Natalie is a member of the GARP Research Fellowship Advisory Board.
Citation
Fritz-Morgenthal, Sebastian, Hellmuth, Julia and Packham, Natalie (2016, January 1). Does risk culture matter? The relationship between risk culture indicators and stress test results. In the Journal of Risk Management in Financial Institutions, Volume 9, Issue 1. https://doi.org/10.69554/NCGI5286.
© Henry Stewart
Publications LLP
Publications LLP