Does Corporate Culture Affect Bank Risk‐Taking? Evidence from Loan‐Level Data
| DOI | http://doi.org/10.1111/1467-8551.12300 |
| Author | Linh Nguyen,Duc Duy Nguyen,Vathunyoo Sila |
| Published date | 01 January 2019 |
| Date | 01 January 2019 |
British Journal of Management, Vol. 30, 106–133 (2019)
DOI: 10.1111/1467-8551.12300
Does Corporate Culture Aect Bank
Risk-Taking? Evidence from Loan-Level
Data
Duc Duy Nguyen, Linh Nguyen and Vathunyoo Sila1
University of St Andrews, The Gateway, North Haugh, St Andrews, Fife KY16 9RJ, UK, and 1University of
Edinburgh, 29 Buccleuch Place, Edinburgh EH8 9JS, UK
Corresponding author email: ddn2@st-andrews.ac.uk
Using comprehensivecorporate and retail loan data, we show that the corporate culture of
banks explains their risk-taking behaviour.Banks whose corporate culture leans towards
aggressivecompetition are associated with riskier lending practices: higher approval rate,
lower borrower quality, and fewer covenant requirements. Consequently, these banks in-
cur larger loan losses and make greater contributions to systemic risk. The opposite be-
haviour is observed among banks whose culture emphasizes controland safety. Our find-
ings cannot be explained by heterogeneityin a bank’s business model, CEO compensation
incentives or CEO characteristics. Weuse an exogenous shock to the US banking system
during the 1998 Russian default crisis to support a causal inference.
Introduction
As part of the debate on banking industry reform,
the corporate culture of banks is seen by many
as a root cause of excessive bank risk-taking be-
haviourand the consequent instability in the finan-
cial system. The recent WellsFargo scandal, for ex-
ample, illustrates how the competitive culture of
We are grateful to Marc Goergen (Associate Editor)
and three anonymous referees for very helpful com-
ments and suggestions. We also thank Maryam Aldos-
sari, Nicola Bianchi, RobBriner, Jie Chen, Angela Gallo,
Marian Gatzweiler, Angelica Gonzalez, Jakov Jandric,
Jens Hagendor, Kevin Holland, Felix Irresberger,
Sotirios Kokas (discussant), Huong Le, Sau Leung, Ivan
Lim, Kent Matthews (discussant), Alistair Milne, Mat-
teo Ronzani, Jakovljevic Sanja (discussant), John Wilson
and participants at the 2017 EFiC Conference in Bank-
ing and Finance in Essex, the 2017 EFMA Meeting in
Athens, the 2016 EUROFIDAI-AFFI Meeting in Paris,
the 2016 Conference on Professional and Ethical Stan-
dards in Banking in Loughborough and seminar partici-
pants at Cardi University forvarious helpful comments.
A previous version of this paperwas circulated with the ti-
tle ‘Bank Culture and Financial Stability: Evidence from
Bank Lending Channels’.
the bank induces its employees to take excessive
risk to meet sales targets.1The scandal echoes the
common narrativeamong the press, regulators and
practitioners that bank culture lies at the heart of
bank risk-taking behaviour and plays a key role
in influencing financial stability.2Despite this pop-
ular narrative, empirical evidence on the relation
between bank culture and risk-taking behaviour
remains scarce.
1‘Fed’s Dudley says Wells Fargo bank culture needs im-
proving’, Bloomberg, 21 March 2017.
2For instance, the UK’s Financial Conduct Authority
planned to conduct a review on bank culture that is be-
lieved to contribute to a string of recent banking scandals
(see ‘UK draws line under “banker bashing” after scrap-
ping assessment’, Financial Times, 30 December 2015).
Similarly, the Dutch Central Bank argues that the key
to preventing financial crises and misconduct scandals
may not be stricter regulations butto oversee culture and
behaviour (De Nederlandsche Bank, 2015). In addition,
Mr William Dudley, the presidentand chief executive of-
ficer of the Federal Reserve Bank of New York, has re-
peatedly emphasized that improvingthe culture of banks
is the key to regain public trust in the financial industry.
C2019 British Academy of Management. Published by John Wiley & Sons Ltd, 9600 Garsington Road, Oxford OX4
2DQ, UK and 350 Main Street, Malden, MA, 02148, USA.
Does Corporate Culture Aect Bank Risk-Taking? 107
Therefore, the objective of our study is to ex-
amine whether bank culture influences a specific
risk-taking process – bank lending decisions. In
this way, we seek to contribute to the manage-
ment literature that studies how corporate culture
aects firm performance (e.g. Bezrukova et al.,
2012; Chatman and Spataro, 2005; Ogbonna and
Harris, 2000). In line with this literature, we fo-
cus on a specific industry (banking) and a specific
behavioural process (lending decisions) to under-
stand how bank culture operates to aect bank
risk-taking and, ultimately, performance.
Our focus on lending is motivatedby several fac-
tors. First, despite technological advances, lending
decisions remain inherently subjective. Banks still
require credit ocers to process, collate and evalu-
ate borrowers’ soft information.3This implies that
lending decisions can be heavily influenced by the
norms around how loan applications are decided.
Second, this setting enables us to exploitthe granu-
lar nature of our corporate and retailloan datasets
and provide micro-level evidence on how bank cul-
ture aects decision-making within the bank. Fi-
nally, as lending is the most fundamental activity
of a bank, how lending decisions are made is likely
to have a significant influence on the health of the
bank and the financial system.
Our measure of corporate cultureis based on the
Competing Value Framework (CVF). Developed
by Quinn and Rohrbaugh (1983), the CVF iden-
tifies four corporate culture dimensions: compete,
create,control and collaborate. These four cultural
dimensions compete for a company’s limited finan-
cial, time and human resources. How a firm re-
sponds to the tension created by these competing
values shapes its culture and, ultimately, the way
people in the firm behave.
Figure 1 summarizes the attributes of these four
cultural orientations. Compete and create cultures
share a growth focus and place the emphasis on
risk-taking, adaptability, competitiveness and ag-
gressiveness.Compete-oriented firms embrace risk-
taking through aggressive competition and focus
3Although some parts of the lending process are auto-
mated, lending decisions need to be approved by credit
ocers and, therefore,are subject to discretion. The prior
literature documents that lending outcomes can be deter-
mined by various characteristics of credit ocers,includ-
ing psychological factors such as mood or emotional state
(e.g. Cort´
es, Duchin and Sosyura, 2016), compensation
incentives (e.g. Cole, Kanz and Klapper, 2015) or career
concerns (Filomeni, Udell and Zazzaro, 2016).
on customer demand. Create-oriented firms, while
also embracing risk-taking, focus on innovation,
vision and constant change. On the other hand,
collaborate and control cultures share a safety fo-
cus and place the emphasis on predictability, con-
formity and compliance. These two dimensions
can be seen as less focused on risk-taking. Control-
oriented firms achieve predictability through a
focus on control, eciency and process ca-
pability. Collaborate-oriented firms achieve pre-
dictability through harmony of people within the
organization.
As lending is a major source of bank rev-
enue and is characterized by high uncertainty,
we hypothesize that banks with a growth focus
(compete and create) are more aggressive when
originating loans in exchange for revenue and
growth. In contrast, we expect to find the opposite
results in banks with a safety focus (control and
collaborate).We examine the influence of these cul-
ture measures on two keylending channels: corpo-
rate lending (syndicated loans) and retail lending
(mortgage loans).
To test this hypothesis, we measure corporate
culture by applying textual analysis to the an-
nual reports of all publicly listed US banks (see
Fiordelisi and Ricci, 2014 for similar approaches).
The premise of textual analysis is that the words
used in the annual reports mirror the corporate
culture that a company has developed over time.
Specifically,we identify a set of keywords and their
synonyms for each cultural dimension and com-
pute the frequency with which each set of words
appears in the annual reports.4
Our analysis begins with corporateloans. We use
the credit ratings of a bank’s borrowers to mea-
sure bank risk-taking in lending. Credit ratings
reflect the borrower’s creditworthiness and abil-
ity to repay loans and, therefore, are key inputs
that banks use to evaluate their borrowers. Con-
sistent with our hypothesis, we find that banks
4This set of keywords, used for measuring each cultural
dimension, is from Fiordelisi and Ricci (2014), who com-
pile a large set of synonyms for each cultural dimension
from those described in Cameron et al. (2006) and the
Harvard IV-4 Psychosocial Dictionary. For instance,
words like‘fast, expand, performance and win’ are associ-
ated with compete culture, words like ‘envision, freedom
and venture’ are associated with createculture, words like
‘cooperate, human and partner’ are associated with col-
laborateculture and words like ‘monitor, competence and
long-term’ are associated with control culture.
C2019 British Academy of Management.
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