Bank Culture

Category: Finance Seminar
When: 24 Oktober 2017
, 16:15
 - 17:30
Where: House of Finance, room Deutsche Bank (E.01)


This paper develops a theoretical model of bank culture. The model is based on a multitasking problem within a bank that involves the bank designing an optimal incentive contract to induce the desired allocation of managerial effort across growth and safety. There is always excessive growth in the second best relative to the first best. Moreover, interbank competition exacerbates this excessive focus on growth at the expense of safety as competing banks all herd on this focus. When culture is introduced as a bank choice, it has two effects. First, when the bank and the manager a bank could hire have possibly different beliefs regarding whether the focus should be on growth or safety, culture assortatively matches managers (whose beliefs are unobservable) with banks that share their beliefs. Second, a strong safety-focused culture reduces the competition-induced excessive focus on growth as well as the herding on growth. Interestingly, the effect of culture is contagious -- a strong safety-focused culture in a subset of banks induces even banks without such a culture to increase their emphasis on safety. This effect of culture becomes stronger with higher bank capital levels and weaker with stronger safety nets.

Link to SSRN