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Does risk culture matter? The relationship between risk culture indicators and stress test results

Author

Listed:
  • Fritz-Morgenthal, Sebastian
  • Hellmuth, Julia
  • Packham, Natalie

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.

Suggested Citation

  • Fritz-Morgenthal, Sebastian & Hellmuth, Julia & Packham, Natalie, 2016. "Does risk culture matter? The relationship between risk culture indicators and stress test results," Journal of Risk Management in Financial Institutions, Henry Stewart Publications, vol. 9(1), pages 71-84, January.
    • Handle: RePEc:aza:rmfi00:y:2016:v:9:i:1:p:71-84
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    Citations

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    Cited by:

    1. Bernhard Streicher & Moritz Bielefeld & Eric Eller, 2023. "The Risk Culture Framework: Introducing an Integrative Framework for Holistic Risk Analysis," SAGE Open, , vol. 13(3), pages 21582440231, August.
    2. Ghafoori, Eraj & Mata, Fernanda & Lauren, Nita & Faulkner, Nick & Tear, Morgan J., 2023. "Measuring risk culture in finance: Development of a comprehensive measure," Journal of Banking & Finance, Elsevier, vol. 148(C).

    More about this item

    Keywords

    risk culture; stress testing; regulatory requirements; risk framework; financial institutions; AQR;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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