Does espoused risk culture pay? Evidence from European banks

Abstract A poor risk culture was one of the causes of the financial crisis. Surprisingly, there is no evidence of the link between risk culture and bank stability. Using a large sample of European banks from 2004 to 2017, our paper shows that a sound risk culture leads to better performance. Our research design is based on three steps. First, we developed a new Sound Risk Culture Indicator based on the Financial Stability Board (2014) risk culture framework. Second, we estimated this new metric by applying Quantitative Text Analysis. Third, we used an IV 2SLS panel data approach to establish a causal link between bank risk culture and profitability.