This PhD thesis explores the relationship between banking regulations and supervision, and financial stability. In terms of the financial stability, I focus on the banking industry and, particularly, on the role of foreign banks in the transmission of shocks through the lending channel. Additionally, I investigate the banking stability through several indicators of a bank’s stand-alone risk, such as the bank’s z-score and the Merton’s (1974) distance to default, among others. With respect to the banking supervision and regulations, I examine two underexplored topics: the role of supervisory cooperation agreements and bank culture for banking stability. Therefore, this study contributes to the banking literature by expanding the empirical evidence in three ways. These are briefly mentioned below.
Firstly, Chapter 2 expands the recent studies on bank lending (e.g., Allen et al. 2017; Adams-Kane et al., 2017) by investigating how lending behaviour of foreign banks is affected through cross-border banking supervision during the global financial crisis. I use a hand-collected data on bilateral and multilateral cooperation agreements at the country-level from central banks and supervisory authorities’ websites, and apply a difference-in-differences (DiD) methodology. I find that a statistically significant relationship exists and that lending by foreign banks decreased in Central and Eastern Europe and Latin America during the crisis. In particular, the foreign banks whose home and host countries supervisors have an agreement on banking supervision reduced their lending less, between 3.6% and 9.9%, than the banks that did not have such type of agreement amid the crisis. This mitigating effect is positively related to the level of supervisory power and the number of on-site inspections, and negatively associated with the level of supervisory consolidation. My findings have important policy implications. My results suggest that to mitigate the international transmission of shocks, the national and international regulators need to enhance supervisory coordination and cooperation among central banks, supervisory authorities, and banking institutions.
Secondly, Chapter 3 expands the existing literature by examining how board attributes such as gender diversity, CEO power and CEO age influence the bank risk-taking behaviour through the bank’s culture. To investigate the research question in this chapter, I create a culture dictionary using 5,813 quarterly earnings call transcripts and a machine learning technique (following Li et al., 2021a). I score the five cultural values of innovation, quality, integrity, respect and teamwork for a sample of 180 US BHCs over the period 2006-2019. To answer the research question, I employ a system of simultaneous equations using the three-stage least squares (3SLS) estimation method among others panel data estimators (i.e., Ordinary Least Square, 2-Stage Least Square and GMM-system estimator).
The findings suggest that banks with cultures of innovation, quality, and integrity help mitigating the default risk for the banks. In addition, the results show that boards with higher gender diversity are positively associated with the innovation, quality, and integrity. It means that more gender-diverse boards exhibit and foster these cultural values in banks I also provide evidence of an economically significant influence of CEO age and CEO power on these culture variables. Thus, this study reveals that the board characteristics of banks influence their risk mitigation through the culture of innovation, quality, and integrity. My analysis in this chapter contributes to the practitioners, policy makers and regulators as it provides evidence to increase the gender diversity in banks, which in turn would improve the bank culture resulting in better bank stability.
Finally, Chapter 4 examines whether and how bank culture helps to mitigate the impact of COVID-19 on banks’ default risk. As mentioned before, I use 2,328 quarterly earnings calls transcripts to measure the corporate culture for a sample of 161 US BHCs over the pre-pandemic period. The number of earnings calls transcripts used in this chapter differs from Chapter 3 due to differences in the sample period. Using a difference-in-differences (DiD) approach, I show that, although the COVID-19 shock increased banks’ default risk, banks with a strong culture exhibit a lower default risk than their peers without a strong culture. In the next step, I group the five cultural values underlying a strong culture into two subcultures: technology-oriented culture comprised of innovation and quality, and people-oriented culture comprised of integrity, respect and teamwork. I find that banks with a strong technology-oriented culture show a lower default risk than their counterparts during the pandemic crisis. Among the three components of people-oriented culture, I find that only integrity helps to mitigate the impact of COVID-19. The results suggest that supervisors’ assessment of culture should focus on encouraging and aligning technology-oriented cultural values with a bank’s strategic goals
