Using a proprietary, hand-collected database of 251 sanctions issued by national and international authorities on 109 European banks, we investigate the deterrent effect of governance effectiveness at the country level on detected bank misconduct from 2009 to 2019. We also examine the impact of detected bank misconduct on depositor behavior to investigate how customer reaction is shaped by media coverage. Our empirical strategy based on probit and panel fixed effects shows the existence of a deterrent effect exerted by country governance effectiveness. Moreover, the instrumental regressions show that depositors react to detected bank misconduct by withdrawing their funds and that this reaction is stronger when news coverage is high.

A poor risk culture was one of the causes of the financial crisis. Surprisingly, there is no evidence of the link between risk culture and bank stability. Using a large sample of European banks from 2004 to 2017, our paper shows that a sound risk culture leads to better performance. Our research design is based on three steps. First, we developed a new Sound Risk Culture Indicator based on the Financial Stability Board (2014) risk culture framework. Second, we estimated this new metric by applying Quantitative Text Analysis. Third, we used an IV 2SLS panel data approach to establish a causal link between bank risk culture and profitability.