Authors: Raffi E. García, Jyothsna G. Harithsa, and Abena Owusu
Journal: Journal of Corporate Finance
Abstract: We study the effects of transparency disclosures on U.S. banks’ relayed culture. Using bank stress-test regulations and a regression-discontinuity design, we exploit the quasi-experimental properties around bank-size policy thresholds. We find that stress-tested banks improve their communicated risk-taking culture and overall corporate culture by improving the sentiment around drivers of risk-taking culture, such as leadership. Stress testing, however, has the unintended consequence of negatively affecting sentiment regarding teamwork and innovation. We find that only banks with strong risk-taking-culture sentiments further reduce their risk weighted assets and risky loans while increasing profitability, highlighting the distinctive role of the risk subculture in banking.
Key Findings
- The authors find that stress-tested banks boost their risk-taking culture and corporate culture while simultaneously reducing risk and improving performance.
- Stress-tested banks, relative to non-stress-tested banks, have improved sentiments in a number of key areas.
