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A Theory of How and Why Central-Bank Culture Supports Predatory Risk-Taking at Megabanks

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  • Edward J. Kane

    (Boston College)

Abstract

This paper applies Schein’s model of organizational culture to financial firms and their prudential regulators. It identifies a series of hard-to-change cultural norms and assumptions that support go-for-broke risk-taking by megabanks that meets the everyday definition of theft. The problem is not to find new ways to constrain this behavior, but to change the norms that support it by establishing that managers of megabanks owe duties of loyalty, competence, and care directly to taxpayers.

Suggested Citation

  • Edward J. Kane, 2016. "A Theory of How and Why Central-Bank Culture Supports Predatory Risk-Taking at Megabanks," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 51-71, March.
    • Handle: RePEc:kap:atlecj:v:44:y:2016:i:1:d:10.1007_s11293-016-9482-x
    DOI: 10.1007/s11293-016-9482-x
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    1. Honohan, Patrick & Klingebiel, Daniela, 2003. "The fiscal cost implications of an accommodating approach to banking crises," Journal of Banking & Finance, Elsevier, vol. 27(8), pages 1539-1560, August.
    2. Aggarwal, Raj & Goodell, John W., 2014. "National cultural dimensions in finance and accounting scholarship: An important gap in the literatures?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 1(C), pages 1-12.
    3. Edward J. Kane, 2006. "Confronting divergent interests in cross-country regulatory arrangements," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 1-12., June.
    4. William Dudley, 2014. "Opening remarks at the Workshop on Reforming Culture and Behavior in the Financial Services Industry," Speech 148, Federal Reserve Bank of New York.
    5. Kane, Edward J, 1988. "Interaction of Financial and Regulatory Innovation," American Economic Review, American Economic Association, vol. 78(2), pages 328-334, May.
    6. Armen Hovakimian & Edward J. Kane & Luc Laeven, 2012. "Tracking Variation in Systemic Risk at US Banks During 1974-2013," NBER Working Papers 18043, National Bureau of Economic Research, Inc.
    7. Halliday, Terence C. & Carruthers, Bruce G., 1996. "The moral regulation of markets: Professions, privatization and the english insolvency act 1986," Accounting, Organizations and Society, Elsevier, vol. 21(4), pages 371-413, May.
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    Cited by:

    1. Jennifer Kunz & Mathias Heitz, 2021. "Banks’ risk culture and management control systems: A systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 32(4), pages 439-493, December.
    2. Mariña Martínez-Malvar & Laura Baselga-Pascual, 2020. "Bank Risk Determinants in Latin America," Risks, MDPI, vol. 8(3), pages 1-20, September.
    3. Edward J. Kane, 2018. "Ethics versus Ethos in US and UK Megabanking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 53(2), pages 211-226, June.
    4. Guo, Lin & Prezas, Alexandros P., 2019. "Market monitoring and influence: evidence from deposit pricing and liability composition from 1986 to 2013," Journal of Financial Stability, Elsevier, vol. 43(C), pages 146-166.
    5. Bholat, David & Brookes, James & Cai, Chris & Grundy, Katy & Lund, Jakob, 2017. "Sending firm messages: text mining letters from PRA supervisors to banks and building societies they regulate," Bank of England working papers 688, Bank of England.

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    More about this item

    Keywords

    Too-big-to-fail; Financial regulation; Financial crisis; Regulatory culture; Financial stability;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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