Organizational Culture, Competition and Bank Loan Loss Provisions
47 Pages Posted: 11 Oct 2021
Date Written: September 10, 2021
This paper examines how banks with different cultures (defined as either control-dominant, collaborate-dominant, compete-dominant or create-dominant) manage their loan loss provisions (LLPs) in response to intensified competition. For identification, we utilise the change in state level competition that followed the passage of the US Interstate Banking and Branching Efficiency Act (IBBEA) of 1994 as a quasi-natural experiment. We find that banks with a control-dominant culture are less likely to exercise discretion over LLPs. In contrast, banks with compete- and create-dominant cultures are associated with higher uses of discretionary LLPs when competition increases. We also find that banks use discretionary LLPs to smooth income and signal private information to outsiders, and this varies by the type of culture. Specifically, in response to the intensified competition, banks with a control-dominant culture are less engaged in income smoothing behaviours. In contrast, banks with create-dominant cultures have a tendency to signal private information to outsiders utilising discretionary LLPs. Finally, banks with a create-dominant culture are more likely to be subject to formal enforcement actions compared to collaborate-dominant counterparts.
Keywords: Bank deregulation, Organizational culture, Competition, Discretionary loan loss provisions, Textual analysis
JEL Classification: G20, G21, G28, M14, M41
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