Enterprise Risk Management and Bank Performance: Evidence from Eastern Europe during the Financial Crisis

Abstract

Does the adoption of the Enterprise Risk Management (ERM) improve bank profitability? Does ERM also reduce bank risk? By analyzing a sample of banks located in European emerging markets between 2005 and 2013, the aim of this chapter is to empirically investigate the determinants of firm performance, both in terms of bank profitability and risk, with respect to the adoption of Enterprise Risk Management (ERM). In order to capture the effect of the ERM program adoption on banks’ performance, we both use market-based measures as well as accounting-based indexes. Following the seminal literature on the topic (Aebi, Sabato, & Schmid, 2012; Eckles et al., 2014; Ellul & Yerramilly, 2013; Hoyt & Liebenberg, 2003, 2011; Lin, Wen, & Yu, 2012; Pagach & Warr, 2010), we adopt a binary proxy variable, that is, the appointment of a Chief Risk Officer (CRO), to define whether the firm is currently undertaking an ERM program. Our results show that a post-ERM firm experiences an increase in the risk-adjusted profits and a reduction of the overall risk.

Citation

Battaglia, F., Fiordelisi, F. and Ricci, O. (2016), "Enterprise Risk Management and Bank Performance: Evidence from Eastern Europe during the Financial Crisis", Boubaker, S., Buchanan, B. and Nguyen, D.K. (Ed.) Risk Management in Emerging Markets, Emerald Group Publishing Limited, Leeds, pp. 295-334. https://doi.org/10.1108/978-1-78635-452-520161022