Chronicles of risk management practices in EU banks: A cross-country analysis

This study investigates whether strong and independent risk management functions enhanced European banks' resilience during the Global Financial Crisis (GFC) and whether banks strengthened these functions in its aftermath. Using hand-collected data to construct a Risk Management Index (RMI) for publicly listed EU banks from 12 countries over 2000-2016, we examine the association between risk management strength, bank risk, and performance. Banks with higher RMIs exhibit significantly lower tail risk and aggregate risk, both during the GFC and across the full sample period, and they also achieve higher stock returns and improved profitability in crisis years. Unlike prior U.S. evidence, these performance benefits extend to non-crisis periods, suggesting that investors consistently value reduced risk exposure. We further document a post-crisis increase in RMI values, indicating that European banks strengthened their internal controls and displayed learning behavior. Overall, the results show that robust risk management contributed to lower risk and better performance during the GFC and that EU banks subsequently reinforced these functions, underscoring their importance for banking stability. These findings contribute to understanding how internal governance mechanisms shape banks' resilience and highlight the importance of risk management evolution in light of subsequent shocks, including the COVID-19 crisis and more recent high-profile bank failures.