Bank Culture and Financial Stability: Evidence from Bank Lending Channels

How Does Corporate Culture Affect Bankss Risk-Taking? Evidence from the European Banking Sector

“…In particular, proof is needed on (i) how the results change when focusing European banks, especially against the background of a more complex environment with two different financial crises potentially influencing the effect of a bank's corporate culture on its risk-taking, and (ii) how corporate culture influences other risk-taking measures aside from credit risk. Nguyen et al (2017) focus on bank's risk-taking in the process of approving and setting-up loan contracts. Likewise using text analysis on 10-K reports to identify corporate culture according to the CVF, they find that compete-oriented banks are associated with riskier lending practices reflected by higher approval rates, lower borrower quality, and fewer covenant requirements.…”

“…Consequently, a control-oriented corporate culture would rather be associated with a comparatively low risk-taking. First evidence of this assumption is provided by Nguyen et al (2017) showing that banks with a control-oriented culture focus on safety and engage in less risky lending activities. Unlike Cerqueti et al (2016), we therefore hypothesize that banks with a control-oriented corporate culture have the lowest risk-taking among the four culture types.…”

“…Concerning compete-oriented corporate cultures, however, we follow the implications derived from Cerqueti et al (2016) combined with the characteristics of compete cultures as described within the CVF and assume high risk-taking for banks that embody this culture. Initial empirical evidence is provided by both Barth (2015) and Nguyen et al (2017). These studies find a higher credit risk and riskier lending practices, respectively, in competition-oriented banks in the US.…”

“…Consequently, there may be some types of corporate culture that tend to promote risk-taking and others that tend to diminish risk-taking. While there are two studies with a focus on US banks supporting the notion of certain types of corporate culture influencing banks' credit risk (Barth 2015;Nguyen et al 2017), the literature lacks empirical evidence for the European banking sector comprehensively assessing banks' risk-taking. This paper attempts to fill this research gap by providing empirical evidence regarding the influence of corporate culture on banks' risk-taking.…”

“…Hence, this paper is the first to focus on the European banking sector and to include the periods of the recent global financial and European debt crisis, enabling analyses of regional and time-dependent differences as well as moderating effects for the crisis' impact. Second, we follow the recent literature on corporate culture (Fiordelisi and Ricci 2014;Cerqueti et al 2016;Nguyen et al 2017) and identify a bank's type of corporate culture by using a text analysis approach based on relevant parts of banks' annual reports (1368 in total), linking pre-defined sets of representative keywords to four dimensions of corporate culture according to the CVF (Nguyen et al (2017). Thus, instead of analyzing the effects of the banking culture (e.g., Cohn et al 2014), our research design is innovated by differentiating between different types of corporate culture.…”