Abstract
We examine the effect of bank culture on financial stability through the lens of bank lending decisions. Using the Competing Value Framework developed in organizational behavior research, we measure bank culture along four distinct dimensions: compete, create, control, and collaborate. We find that compete-dominant banks are associated with riskier lending practices – higher approval rate, lower borrower quality, and fewer covenant requirements. These banks exhibit higher loan growth, but incur larger loan losses. As a result, they make greater contributions to systemic risk. We find the opposite results among control-dominant banks, whose culture emphasizes control and safety. Our findings cannot be explained by the bank business models, CEO compensation incentives and CEO characteristics. To establish causality, we use the exogenous shock to the US banking system during the Russian crisis of Fall 1998.
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