European banks outperform American banks since the financial crisis

August 11, 2016

Which banks did not recover from the financial crisis, and why? That question is the focus of a research of Joris van Toor, Kees Cools and Arthur van Soest. They answer this question for U.S. and European banks.

Using a sample of the 411 U.S. banks, the authors find strong evidence that U.S. banks which showed superior stock returns before the crisis were bottom performers during the crisis. More surprisingly, they report new evidence that pre-crisis high performing U.S. banks were not able to recover after the crisis, they remained bottom performers until 2016. Hence pre-crisis high stock returns of U.S. banks predict low stock returns since the onset of the crisis. These results are not driven by size, type of banks (investment vs. commercial banks), delistings or other factors.

High pre-crisis stock returns of U.S. banks were associated with some important pre-crisis risk characteristics, notably high leverage, large fraction of short-term funding, risky assets, high variability in stock returns and large exposure to the real estate market.


For the U.S., the authors argue that high stock returns were caused by the (risky) business model characteristics and associated risk culture of these outperforming banks before the crisis. Their low stock returns during the crisis were the flip side of that same risky business model. They suggest that the subsequent underperformance of these banks during the six years after the crisis was due to the tightening of bank regulation, which turned the pre-crisis high performing business model largely obsolete. Apparently the risky and sometimes backstreet business model was so deeply engrained in their culture and behavioral and organisational DNA that these banks were not able to transition to a new, more trust based and client centric business model.

Negative correlation

For a sample of 247 European banks the authors find a negative correlation between pre-crisis and crisis bank returns, but no relation between pre-crisis returns and returns up after the crisis. They argue that the risky business models and risk culture were less prominent at European banks, leading to a lower necessity for a fundamental post-crisis transformation.

The short answer to the research question is that U.S. banks did not recover from the financial crisis due to their engrained risky business model and ditto culture, while European banks on average did recover.

More information: 'When are pre-crisis winners post-crisis losers?' , by Joris van Toor and Kees Cools from TIAS, School for Business and Society, and Arthur van Soest from Tilburg University.
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