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Does corporate culture of banks matter? Many people think so. Several commentators attributes Well Fargo’s recent scandal to ‘toxic’ culture (see for example these articles from the , , and ). Various regulators, including the UK’s , , and the have increasingly emphasized that improving the culture of banks is the key to regain public trust on the financial industry. Therefore, understanding how bank culture affects financial stability is a question of first-order importance.

In a recent funded research project Dr Ben Sila with Dr Duc Duy Nguyen and Dr Linh Hoai Nguyen at the University of St Andrews, examined whether corporate culture of banks affect their risk taking behaviour. They focus on bank lending, as a specific channel through which culture may affect risk-taking decisions. Despite technological advances in term of credit storing and automation of credit applications, credit officers remain highly involved in how ‘soft information’ can be evaluated. Therefore, these decisions can be heavily influenced by ‘norms’ of how loan applications are decided. Further and perhaps more importantly, lending is a very fundamental activity of banks and how lending decisions are made is likely to have a great impact on the economy.

They used textual analysis on a large sample of banks to classify them into different cultural categories based on the Competing Value Framework (pictured below). Banks that frequently mention words such as “aggressive” and “competition” were classified as having a compete-oriented culture. Compete banks embrace risk-taking through aggressive competition and focus on gaining market share. At the other extreme, banks that frequently mention words such as “control”, “risk management”, or “safety” were classified as having a control-oriented culture. Control banks focus on safety and place an emphasis on predictability, conformity, and compliance. Create-oriented banks and collaborate-oriented banks lie somewhere in between, the former focuses on innovation and the latter focus on harmony of people within the organization.

They found that banks with a growth focus culture are more likely to have borrowers with poorer credit ratings, while those with a safety focus are less likely to do so, with the effects concentrated on compete- and control-oriented banks. Specifically, borrowers of compete-oriented banks are significantly more likely to be sub-investment grade borrowers. Consistent with these banks being profit-driven, they charge risky borrowers a higher loan spread over safe borrowers, while impose them with significantly fewer covenants in the loan contracts. Consequently, these banks exhibit higher loan growth in normal times, but incur significantly greater loan losses in times when the economy is in distress. Using a commonly employed measure of bank systematic risk, they found that compete-oriented banks exhibit a significantly greater influence on the instability of overall financial system.

In contrast, they found the opposite results for safety-focused banks (control- and collaborate-oriented).

Overall, not only does bank culture affect risk-taking of individual banks, it also has far-reaching consequences to the overall stability of the financial system and the economy. Taken together, our results resonate the view of policymakers that bank culture indeed plays an important role in influencing bank behaviour and systemic stability. Thus, at the very least, this study serves as a justification for regulators to make corporate culture their regulatory priorities and it is hoped that our work will lead to a better understanding on how corporate culture in the financial sector can influence the overall financial stability.