Performance and risk – a changing and complex relationship for banking business

Abstract

The paper aims to analyse the evolution of the European banking sector between two global crises. It focuses on the factors that triggered the banking transformation after 2008 and on the interrelationship between business activity and risk related indicators. The research also considers the development of the banking sector and the necessity to be permanently equipped with the proper mitigation strategies for a constantly changing risk landscape. We selected the most important European banks that, during the entire analysed period, maintained their leading positions through increased financial performance and efficient risk management. The results of the study indicate that the profitability of European banks registered a mixed evolution, depending on the indicator considered for the analysis. In terms of risk, the strategic analysis of the Basel framework indicates a link between the state of the banking sector and the prudential framework when comparing the global financial crisis with the crisis generated by the Covid-19 pandemic. To enrich the research, we considered top 10 banking organisations from Western Europe and top 10 from Central and Eastern Europe. The results of the comparative analysis between West and East indicate structural differences that emerge as a result of different ways of doing banking business. Profitability and risk maintain their key importance, as the risk landscape evolved at the same pace with the banking activity. Besides the traditional financial risks, other factors of risk have reached an importance level which question the capacity of the risk management function at the level of banking organisations to keep up in a volatile, dynamic and complex environment.

Keywords

• banks
• transformation
• regulatory reform
• risk management
• profitability