European banks and risk management: Did the 2008 financial crisis have any impact?

Abstract

The ongoing COVID-19 crisis has redirected attention to the importance of robust risk management practices and well-established risk management cultures within financial institutions. Various studies have highlighted the positive implications of strong risk management practices on performance and market rewards during a single-wave crisis. Are these findings, however, consistent also across a multiple-wave prolonged crisis? To answer this, the authors analyse a prolonged crisis period ranging from 2008 to 2011 using a dataset comprising of 13 systemically important European banks. This study further analyses whether a prolonged crisis period encourages banks to permanently strengthen their risk management practices during or post-crisis turmoil, potentially capturing elements of bank risk culture. The authors find that higher levels of risk management contribute to better bank performance measured through the return on assets (ROA) and annual returns. Unlike in a single-wave crisis period, however, the results show that banks having in place stronger risk management practices do not benefit from superior bank performance and market rewards during a multiple-wave crisis period. The authors also find that banks which perform worse during a multiple-wave crisis period fail to later improve their risk management practices. The study concludes by providing insightful guidance to policy makers aiming to contribute towards enhancing bank risk management in response to the COVID-19 crisis.