Joel Suss, David Bholat, Alex Gillespie and Tom Reader
‘Bad cultures’ at banks are often blamed for scandals and crises, from the global financial crisis to the mis-selling of payment protection insurance (PPI) in the UK. Yet surprisingly little research has tested this claim. This is because quantifying culture is difficult to do. Our working paper gives it a go. Leveraging unique access to data available to regulators, we diagnose the cultural health of the UK banking sector. We find that banks with organisational cultures two standard deviations below the sector average are associated with a 50% increased risk of failure.
This year marks 25 years since the failure of Barings Bank. On Sunday 26 February 1995, the 200-year old merchant bank blew up thanks to derivatives trading, which it believed was both risk-free and highly profitable. It was neither of these things. The firm’s star trader was illicitly pursuing a strategy akin to ‘picking up pennies in front of a steam-roller‘. The steamroller arrived in the form the Kobe earthquake. The star trader’s losses ballooned and he doubled up on his bets, unsuccessfully. Barings went bankrupt. The episode captured the public imagination, and helped lead to the creation of a new regulator in the UK.
Zahid Amadxarif, James Brookes, Nicola Garbarino, Rajan Patel and Eryk Walczak
The banking reforms that followed the financial crisis of 2007-08 led to an increase in UK banking regulation from almost 400,000 to over 720,000 words. Did the increase in the length of regulation lead to an increase in complexity?