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Journal Article
The Gordon Gekko effect: the role of culture in the financial industry
Culture is a potent force in shaping individual and group behavior, yet it has received scant attention in the context of financial risk management and the 2007-09 financial crisis. This article presents a brief overview of the role of culture as it is seen by psychologists, sociologists, and economists, and then describes a specific framework for analyzing culture in the context of financial practices and institutions. Using this framework, the author addresses three questions: (1) what is culture? (2) does it matter? and (3) can it be changed? He illustrates the utility of this framework by ...
Journal Article
Introduction and appendix to Behavioral Risk Management in the Financial Services Industry: The Role of Culture, Governance, and Financial Reporting
This volume, four years in the making, includes nine research papers that aim to identify and understand the key factors affecting governance and culture in the banking industry. The volume is divided into two complementary parts. Part I introduces the concept of culture and its importance to risk management and financial stability. The articles present a framework for diagnosing and changing culture, describe how corporate culture is shaped, explore the importance of effective risk management, and examine the roles of deferred cash compensation and bank cash holdings in promoting financial ...
Working Paper
Bank Risk-Taking and Monetary Policy Transmission: Evidence from China
We present evidence that monetary policy easing reduces bank risk-taking but exacerbates capital misallocation in China after implementing the Basel III capital regulationsin2013. Thenewregulationstightenedbankcapitalrequirementsandintroduced a new risk-weighting approach to calculating the capital adequacy ratio (CAR). To meet tightened capital requirements, a bank can boost its effective CAR by raising capital or by increasing the share of lending to low-risk borrowers. Using confidential loan-level data from a large Chinese commercial bank, merged with firm-level data on a large set of ...
Working Paper
Information Disclosures, Default Risk, and Bank Value
This paper investigates the causal effects of voluntary information disclosures on a bank's expected default probability, enterprise risk, and value. I measure disclosure via a self-constructed index for the largest 80 U.S. bank holding companies for the period 1998-2011. I provide evidence that a bank's management responds to a plausibly exogenous deterioration in the supply of public information by increasing its voluntary disclosure, which in turn improves investors' assessment of the bank risk and value. This evidence suggests that disclosure may alleviate informational frictions and lead ...
Working Paper
The limits of forward guidance
The viability of forward guidance as a monetary policy tool depends on the horizon over which it can be communicated and its influence on expectations over that horizon. We develop and estimate a model of imperfect central bank communications and use it to measure how effectively the Fed has managed expectations about future interest rates and the influence of its communications on macroeconomic outcomes. Standard models assume central banks have perfect control over expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called ?forward guidance ...
Speech
Things That Have Never Happened Before Happen All the Time
Remarks at the Central Bank of Nigeria’s Second National Risk Management Conference (delivered via videoconference).
Speech
Climate Change and Risk Management in Bank Supervision
Remarks at Risks, Opportunities, and Investment in the Era of Climate Change, Harvard Business School, Boston, Massachusetts.
Working Paper
Managing Risk in Cards Portfolios: Risk Appetite and Limits
We describe an important risk management tool at financial institutions, risk appetite frameworks. We observe those frameworks for credit cards portfolios at four large banks and analyze when and why banks adjust them. The risk appetite frameworks for these banks monitor 40 to 150 metrics. We focus on metrics related to outstanding balances of which we identified 79. Overall, we find that these frameworks are sticky. Most adjustments occur during scheduled annual reviews and are relatively limited. Limit breaches are rare. Thresholds are often changed the month after a breach or after the ...
Briefing
How Does Market Competition Affect Banks' Adaptation to Changes in Flood Risks?
This article examines the interplay between market competition and banks' strategic responses to projected long-term changes in flood risks, using data from the home-equity credit market post-Hurricane Harvey. Our work reveals that banks updated their risk models based on exposure to the hurricane, with those in competitive markets less likely to adopt cautious lending practices. It also explores the concept of strategic complementarity, showing that banks' adaptive behaviors are influenced by their competitors. These findings shed insights on how market forces may influence the way banks ...
Journal Article
Corporate culture in banking
Until recently, regulatory discourse has paid scant attention to the issue of organizational culture in banking. Yet ethical lapses and systematic weaknesses exposed in the 2007-09 financial crisis suggest that future policy dialogue is unlikely to ignore culture?s significance. Drawing from an approach developed in organizational behavior research, the author introduces a framework for diagnosing and changing corporate culture in a way that more effectively supports the bank?s growth strategy and induces behavior that enhances financial stability. The normative exercise, highlighting the ...