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Research paper

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

Joseph Falzon and Jennifer Vella
Journal of Risk Management in Financial Institutions, 14 (1), 84-95 (2020)
https://doi.org/10.69554/VJRC3548

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.

Keywords: risk management; banks; multiple-wave crisis; risk culture

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Author's Biography

Joseph Falzon is the former Head of the Department of Banking and Finance and the former Dean of the Faculty of Economics, Management and Accountancy at the University of Malta. He holds a PhD in Economics from Northwestern University, USA, and has served as a consultant to several leading Maltese organisations and financial institutions. Professor Joseph Falzon has also been nominated as member of the Board of Directors on several financial companies registered in Malta.

Jennifer Vella started her career at Apex Fund Services (Malta) Limited as a fund accountant, later moving to the Central Bank of Malta, where she was employed as a Financial Analyst of European Regulation. In 2016, Jennifer joined AQA Capital Ltd., where she acted as Chief Risk Officer. Ms Jennifer is now employed as a Senior Risk Executive and Head of the Risk Management Department at ZASMalta ltd. She is in possession of an Honours and Master’s Degree in Banking and Finance.

Citation

Falzon, Joseph and Vella, Jennifer (2020, December 1). European banks and risk management: Did the 2008 financial crisis have any impact?. In the Journal of Risk Management in Financial Institutions, Volume 14, Issue 1. https://doi.org/10.69554/VJRC3548.

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cover image, Journal of Risk Management in Financial Institutions
Journal of Risk Management in Financial Institutions
Volume 14 / Issue 1
© Henry Stewart
Publications LLP

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