When Are Pre-Crisis Winners Post-Crisis Losers?

Abstract

Which banks did not recover from the financial crisis, and why? We document that pre-crisis high performing U.S. banks were not able to recover and to restore their performance up to eight years after the onset of the crisis. We demonstrate that their (risky) business models which allowed them to outperform their peers in the run up to the crisis were not viable anymore afterwards, leading to lagging post-crisis stock returns. Their risk culture and business model were based on low Tier 1 Ratios, high leverage and other risk factors, which were not allowed or profitable anymore after the crisis, hence their low post-crisis returns. For Europe, we find no significant correlation between pre- and post crisis bank returns. Risky business models and risk culture were less prominent at European banks, leading to a lower necessity for a fundamental post-crisis transformation.

Keywords: Banking, Financial Crisis

JEL Classification: G01, G21