Bank culture

Fenghua Song, Anjan V. Thakor

Research output: Contribution to journalArticle

2 Scopus citations

Abstract

We develop a model in which bank culture improves upon outcomes attainable with incentive contracting. The bank designs a second-best incentive contract to induce the desired managerial effort allocation across growth and safety, but this induces excessive growth relative to the first best, a distortion exacerbated by interbank competition. Bank culture has two effects: it matches managers to banks with similar beliefs, and a safety-oriented culture reduces the competition-induced excessive growth focus. Culture is also contagious – a safety-oriented culture in some banks causes others to follow suit – this effect strengthens with higher bank capital and weakens with stronger safety nets.

Original languageEnglish (US)
Pages (from-to)59-79
Number of pages21
JournalJournal of Financial Intermediation
Volume39
DOIs
StatePublished - Jul 1 2019

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All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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