Adding Stress in Banking: Transparency Disclosures and Corporate Risk Culture

Abstract

We study the effects of transparency disclosures on the risk culture, corporate culture, and performance of U.S. banks. Using stress test regulation, textual analysis, and a regression discontinuity design, we exploit the regulation's quasi-experimental properties around the bank-size policy thresholds. We find that stress-test banks substantially improve their risk and corporate cultures. Strong risk culture banks further reduce their risk densities, risky loans, and costs of debt while increasing profitability. Surprisingly, these effects do not exist among the subset of banks with strong corporate culture only. When examining banks with both strong risk and corporate cultures, the effects switch signs showing evidence of moral hazard. Our findings highlight the differentiating role of risk culture and the restraining impact organizational culture has in mitigating risk.