Risk management in a customer-owned bank. A case study of Länsförsäkringar Bank

Abstract: Background: In the wake of the latest financial crisis, which was characterized by excessive risk-taking and short-term behavior to increase shareholder values, there has been a shift from financial risk management to enterprise risk management (ERM). New regulations have been introduced to sharpen the risk management in the financial service sector, but these regulations have been criticized for being too standardized and encouraging uniformity. From a risk perspective customer-owned banks are interesting as they generally are more risk averse and long-term oriented than shareholder-owned banks. Still, customer-owned banks also have to comply with the stricter regulations, which are perceived to be designed primarily for shareholder-owned banks. Purpose: The purpose of this research is to understand how a customer-owned bank manages risks at multiple organizational levels, and how the bank is affected by regulatory pressures. Method: In order to fulfill the stated purpose and answer the research question, a single case study of the Swedish bank Länsförsäkringar Bank (LF Bank) is conducted. The case study is primarily based on interviews performed with representatives from LF Bank, and further supplemented with internal documents provided by the respondents and publicly available documents from the bank’s website. Conclusion: Based on the principles of customer-ownership, LF Bank has chosen to have a low risk profile. The bank is practicing risk management in accordance with the ERM approach, whereby risk management is aligned with strategic objectives and integrated into the management control system. The stricter regulations have led to increased centralized control and administration. However, the employee empowerment and motivation have not been reduced. The results show that the customer-ownership of LF Bank has facilitated the implementation of the regulations as the organizational culture is based on customer protection. We can conclude that LF Bank’s low risk appetite is embedded in their customer ownership, and not a consequence of stricter regulations. Suggestion for further research: We suggest that a comparative case study is conducted in future research in order to increase the understanding of the differences between how a customer-owned bank and a shareholder-owned bank manage risks and are affected by regulatory pressures.