Bank Culture and Bank Liquidity Creation

• Published date: 01 November 2024
• Author: Loan Quynh Thi Nguyen,Luu Duc Toan Huynh
• Date: 01 November 2024
• DOI: http://doi.org/10.1111/corg.12580

Corporate Governance: An International Review, 2024; 32:1087–1109

https://doi.org/10.1111/corg.12580

1087

Corporate Governance: An International Review

ORIGINAL ARTICLE OPEN ACCESS

Bank Culture and Bank Liquidity Creation

LoanQuynhT hiNguyen1 | LuuDucToanHuynh2

1National Economics Univ ersity, Hanoi, Vietnam | 2D epartment of Business An alytics and Applied Econom ics, Queen Mary Univer sity of London, London,

UK

Correspondence: Loa n Quynh Thi Nguyen ( loanntq@neu.edu.vn)

Received: 15 March 2023 | Rev ised: 16 February 20 24 | Accepted: 20 Febr uary 2024

Keywords: bank cultur e | bank liquidity | bank r isk

ABS TRAC T

Research Quest ion/Issue: This study aimed to understa nd the impact of bank culture on liquidity creation by applying t extual

analysis to data f rom US bank holding companies.

Research Fi ndings/Ins ights: The results ind icated a substantial connection bet ween bank culture and liquidit y creation.

Control and collaborative cultures negat ively impacted liquidity creation, whereas a competing cultur e had a positive effect. The

negative impacts were stronger in more diversif ied, experienced, and profitable banks and weaker in lar ger banks. In complete

culture banks, l iquidity creation decreased with increased ex perience and profitability but increased with size. T he influence of

culture on the different aspe cts of liquidity creation was similar acros s the board for overall liquidity generation.

Theoretica l/Academic Implic ations: By introducing a new ba nk culture index, thi s study offers a unique contribution to

the academic understanding of the inter play between organizational cu lture and financial per formance, particul arly liquidity

creation.

Practit ioner/Policy Impl ications: The insights from this st udy are valuable for bank managers and regulators as they h igh-

light the aspects of bank c ulture that can be leverage d or adjusted to optimize liquidity creat ion, thereby informing strateg ies

and policy de cisions.

1 | Introduction

Liquidity creation is a key function of bank s in the economy be-

cause it provides credit for economic development. Liquidity is

created on the balance sheet when banks f und relatively long-

term assets (e.g., bank loans) by mobilizing short- term funds

(e.g., deposits). Liquidity is also created off the balance sheet by

providing serv ices (e.g., loan commitments and standby credit

letters), which enable firms to operate their long- run invest-

ment projects more effectively (i.e., Holmström and Tirole1998 ;

Kashyap, Rajan, and Stein 2002). Undoubtedly, banks that are

better able to generate liquidity can not only enhance their ow n

profitability but also contribute to f inancial and economic de-

velopment (Berger and Sedunov 2017 ; King and Levi ne 1993;

Levine and Zer vos1998). Thus, understanding the determinant s

of liquidity creation is critical fr om both the academic and

management perspectives. Unfor tunately, liquidity creation is

often associated w ith risk (Allen and Gale200 4; Diamond and

Rajan 20 01). Therefore, to improve liquidity creation perfor-

mance, banks need a good c ulture that maintains a suitable bal-

ance between promoting risk- taking and mai ntaining long- term

sta bil it y.

Corporate culture is defi ned as the values and beliefs that compa-

nies promote to guide their employees' behavior (Guiso, Sapienza,

and Zingales 2015; Schei n19 91). Business managers often v iew

culture as a fir m asset that improves performance and is a major

value driver (Graham et al. 2 017). Given the high r isks related

to liquidity creation, many view c ulture as a key factor in main-

taining the sa fety and soundness of banki ng systems. According

This is an open ac cess article un der the terms of the Creat ive Commons Attribution Lic ense, which perm its use, distri bution and reproduction i n any medium, provi ded the original w ork is

properly cited.

© 2024 The Autho rs. Corporate G overnance: An I nternational Re view published by Joh n Wiley & Sons Ltd.

[Correction added o n 30 August 202 4, after fir st online publicat ion: In the authorship, t he author’s order was amended t o Loan Quynh T hi Nguyen, Luu Duc Toa n Huynh.]

Corporate Governance: An International Review, 2024

to several studies, organ izational culture is a cruci al strate-

gic resource that contributes to f irms' successf ul performance

(i.e., Deal and Kennedy1983; Gordon and DiTomaso19 92; Kotter

and Heskett1992 ; Peters and Waterman1982). Additional ly, anec-

dotal evidence from regulator s and business leaders indicates that

organizational culture i s established at the top management level

(CEO and board) and stakeholders significa ntly shape and affect

corporate culture, par ticularly after a financia l crisis. This has led

to an ever- increasing emphasis on fost ering solutions for sustain-

able growth and ethical and profes sional standards throug h gov-

ernance reforms. Therefore, a clear er understanding of the factors

that contribute to a bank's capacit y to create liquidity, such as its

organizational culture , is essential for both development and fi-

nancial stability. In contrast to t he existing literature on national

culture (Boubakri et al.2023), this study is the fir st to examine

microscopic data on bank cultur e and liquidity creation.

This study explores the cultu re–liquidity creation nexus bas ed on

a unique dataset of US bank holding companie s. We download

our bank- level measure of liquidity creation from Bouwman's

website: https:// sites. google. com/a/ tamu. edu/ bouwm an/ data.

For bank culture, we follow earlier studies (i.e., Fiordelisi and

Ricci 2 014; Fiordelisi and Ricci 2021; Nguyen, Nguyen, and

Sila 2019) and employ textual analy sis to measure culture in

a banking system us ing the Competing Values Framework

(CVF). This method enables us to c apture differences in culture

among banks, which is impossible usi ng traditional soft infor-

mation data- g athering techniques (e.g., interviews and sur veys).

Following the CVF approach , we select several keywords related

to each bank culture and ca lculate the frequency of each term's

appearance in bank s' official documents to obtain the scores for

each cultural dimension (Lough ran and McDonald2011).

The CVF categor izes organizational cu lture into four distinct

orientations —control, col laboration, competition, and c re-

ation—which are linked to speci fic ideologies and values that in-

fluence bank behavior. Organi zational cultures that emphasize

control and collaboration are characteri zed by an internal focus

and prioritize safety. A control- oriented cultu re is marked by a

commitment to efficiency, predictability, and control, whereas

a collaboration- oriented cultu re places a higher value on foster-

ing employee growth and empowerment (Cameron etal. 2006;

Nguyen, Nguyen, and Sila 2019). In contrast, culture s with

competition and creation orientations are outward- lookin g and

aimed at expansion and adaptation. A competition- oriented cul-

tures typica lly responds assertively to ex ternal environmental

changes, whereas a creation- oriented culture is associat ed with

continuous changes, entrepreneurship, and visionary thinking.

To evaluate organizational cultu re within the CV F framework,

we adopt a methodology consistent with prior academic resea rch,

namely, textual analysis (Fiordelisi a nd Ricci 2 014; Fiordelisi

and Ricci2 021; Nguyen, Nguyen, and Sila 2019). This approach

enables us to analyze multiple organizational c ultures across a

broad sample of banks, an underta king that would be imprac-

tical using traditional method s (e.g., surveys, questionnaire s,

and interviews) to collect soft in formation. In this technique, we

first select specif ic terms associated with each corp orate culture.

Then, following the approach of Lough ran and McDonald(2011),

we measure the frequency of the terms i n official documents pro-

duced by banks for communicatin g with external stakeholders.

Our results show that bank c ulture influences ban k liquid-

ity. In particular, we find ev idence that banks with Contro l

and Compete cultures create more liquidity, while banks with

a Create culture c reate less liquidity. The positive inf luence of

Control culture is stronger a mong larger, more diversified, more

experienced, more profitable, and more stable banks , whereas

banks with a Compete culture create les s liquidity when they

become bigger and more profitable and only create more li-

quidity when they achieve stability. We find that bank s with a

Collaborate culture create more liquidity when they experience

higher levels of diversification and st ability. Finally, we show

that banks with a Create culture generate more liquid ity when

they are larger, more experienced, more profitable, and more

stable.

By providing the fi rst empirical evidence of the link bet ween

culture and liquidity creation, we m ake numerous contribu-

tions to the existing literatu re. First, we add to the stra nd of

research on liquidity creation determi nants (i.e., Berger and

Bouwman  2009, 2017 ; Distinguin, Roulet , and Tarazi 2013;

Huang, Chen, and Chen2018) by demonstratin g that bank cul-

ture is an important determ inant. Second, we extend the recent

strand of literature that exam ines the role of corporate culture

and firm perform ance (i.e., Fiordelisi and Ricci 2014; Peters

and Waterman1982; Sackma nn2011; Schein1991; Wilk ins and

Ouchi1983) by showing t hat organizational culture is related to

another key function of banks: creati ng liquidity. Finally, we add

to the growing body of literat ure that employs text- based anal-

yses of large dataset s to quantify corp orate culture (Fiordelisi

and Ricci 2014 ; Jiang, Kim, et al. 2019; Nguyen , Nguyen, and

Sila 2019), sentiment (Loughran and McDonald 2011, 2016),

banking competition (Bushman, Hendricks, and Williams2 016),

and financial constr aints (Hoberg and Maksimovic2015).

The remainder of this paper is organi zed as follows. Section 2

presents a literature review and t he hypotheses. Section 3 de-

scribes t he data and ec onometric strat egy. Section 4 provides

and discusses the empirica l findings, and S ection5 c oncludes

the pap er.

2 | Literature Review and Hypothesis

Development

2.1 | Literature Regarding Liquidity Creation

and Bank Culture

Prior studies have shown that liquid ity creation is significantly

associated with sev eral bank- , institutional- and regulatory-

level factors as well as macroe conomic factors. For example,

many scholars (i.e., Berger and Bouwman 2009; Distinguin,

Roulet, and Tarazi2013) have demonstrated th at bank capital

has both positive and negative impact s on liquidity creation.

The “risk absorption” hypothesis pred icts a positive influence

of bank capital as a higher level of capital enables ban ks to

absorb more risks arisin g from higher amount of liquidity cre-

ation. In contrast, the “fi nancial fragi lity- cro wding out” hy-

pothesis suggests a contra sting nexus given that higher capital

ratio crowds out deposits, leading less liquidit y creation. Other

scholars (i.e., Berger etal. 2016; Berger and Bouwman 20 17;

Díaz and Huang 20 17; Huang, Chen, and Chen 2018; Jiang ,

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