How language shapes bank risk taking

We analyze the impact of language on risk-taking behavior of banks. Languages that grammatically distinguish between present and future events make the future feel more distant than the present and as thus favor a less future-oriented behavior (Chen, American Economic Review, 2013). Our hypothesis is that these languages lead banks to take more risk since they reduce the perception of potential losses associated with risky activities. We investigate this hypothesis on a sample of 1401 banks from 81 countries over the 2010–2017 period. We perform random effects regressions of bank risk, measured by the Z-score, on the type of language. We find that banks from countries with future tense marking take more risk in accordance with our prediction. This finding is robust to the inclusion of alternative culture indicators, to alternative definitions of bank risk and of future time reference. We also observe that future tense marking is associated with greater occurrence of banking crises. Our conclusion is thus that language contributes to explain the cross-country differences in bank risk-taking.