The Effects of Cultural Values on Bank Failures around the World

Abstract

We conduct the first broad-based international study on bank-level failures covering 92 countries over 2000–2014, investigating national cultural variables as failure determinants. We find individualism and masculinity are positively associated with bank failure, but they operate through different channels. Managers in individualist countries assume more portfolio risk, while governments in masculine countries allow banks to operate with less liquidity and less often bail out troubled institutions. Findings are robust to accounting for endogeneity, different techniques and measures, and additional controls. Results have implications for prudential policies, including regulation, supervision, and bailout strategies, that may partially mitigate some negative effects of culture.

Individualism, Formal Institutional Environment and Bank Capital Decisions

“…For example, model 8 shows that a one-standard deviation increase in individualism (0.235) is associated with a decrease in bank regulatory capital ratio of approximately 0.016 (=0.068*0.235) or 8.29% (=0.016/0.193; statistically significant at p<1%). Such a result is consistent with the conjecture that managers in individualistic countries are overconfident (Chen et al, 2015), they engage in high risk-taking activities and tend to adopt less risk compensating mitigation measures such as holding higher capital ratios (Berger et al 2020). They perceive a less strict regulatory environment as an avenue for success, innovation, and growth (Cline and Williamson, 2017).…”

“…Chen et al (2015) relate individualism to overconfidence. Berger et al (2020) find that bank managers take on larger portfolio risks in individualistic countries than in collectivist countries. Because individualistic countries reward individual success and profit making, risk-taking incentives for individuals are higher than in collectivist countries.…”

“…Because individualistic countries reward individual success and profit making, risk-taking incentives for individuals are higher than in collectivist countries. In addition, independent decisions involve riskier behavior, since individual risk-taking is more tolerated (Shupp and Williams, 2008and risk management oversight is weaker than in collectivist countries (Berger et al 2020).…”

“…Holding higher regulatory capital is an internal source of funds to protect banks against default, and thus, a signal to both regulators and the public that the bank is sound and well managed. Because managers in individualistic countries seek personal success, profit making, and tend to be overoptimistic, they are more likely to increase their investments and engage in riskier activities (Berger et al 2020) while holding lower regulatory capital ratios. Moreover, managers in countries with individualistic cultural values perceive a less regulated banking system as an avenue for opportunities and personal triumph (Cline and Williamson, 2017).…”

“…First, we contribute to the literature showing that culture influences bank risk-taking and performance. For example, Berger and al. (2020) show that informal institutional environment matters to better understand bank failures around the world.…”