Factors influencing bank risk in Europe: Evidence from the financial crisis

• We analyze bank-specific and macroeconomic determinants of bank risk.
• We use the system-GMM estimator, developed for dynamic panel models.
• Capitalization, profitability, efficiency and liquidity are inversely related to risk.
• The recourse to wholesale funding by banks seems to increase their risk.
• A context of economic crisis (with a falling GDP) increases bank risk.

We use a dynamic panel data model to analyze bank-specific and macroeconomic determinants of bank risk for a large sample of commercial banks operating in the euro area. The selected time span, from 2001 to 2012, considers the impact of the on-going financial and economic crisis on the Eurozone banking system. Our results indicate that capitalization, profitability, efficiency and liquidity are inversely and significantly related to bank risk. However, the recourse to wholesale funding by banks seems to increase their risk. We also find that less-concentrated markets, lower interest rates, higher inflation rates and a context of economic crisis (with a falling GDP) increase bank risk.