The effects of global financial crisis on the behaviour of European banks: A risk and profitability analysis approach

Abstract

The effects of global financial crisis have been severe on banks. Many banks went bankrupt and many are in distress due to their sensitivities, stored in their balance sheets, to financial risks enlarged by the crisis. Some of banks, on the other hand, have felt the effects slightly. Recalling that total risk is sum of two parts of risk namely; volatility and sensitivity and that volatility is not under the discretion of banks, i.e. externally determined, it is assumed that the degree of banks getting affected by the global financial crisis is largely dependent on their sensitivities to risks. Banks' sensitivities to risks are assumed to be under the control of banks. Thus, in line with their risk appetite, banks can always change the structure of their balance sheet to alter their sensitivities to financial and non financial risks. In this paper it is targeted to analyze and compare the balance sheet structure banks from 27 European countries in order to find their sensitivities to different financial risks such as credit risk and liquidity risk. It will further be analyzed how banks' balance sheet structures have been altered after the crisis. To observe the behavioural variations (if there is any) of banks getting affected by financial crisis, the analysis is widened to include different characteristics of banks such as; the country where they are operating, region where they are belong to, scale of their operations, their ownership, their type and etc.