“Behaviour”in the paper refers to actions by ﬁnancial ﬁrm agents such as learning,
creating knowledge and social resources and mobilising these resources in organisations
and market networks. It also refers to biases and risk-taking behaviour by individuals in
ﬁnancial markets as expoundedin behavioural ﬁnance theories (Statman, 1999).
The paper explores how ﬁnancial ﬁrms use social and knowledge resources to create
information, control behaviour and enhance decision conditions when exploiting ﬁnancial
resources. They mobilise intangible resources to reduce information asymmetry and
transaction costs. They do this to enhance liquidity management, diversiﬁcation and risk
management. This creates conditions for ﬁnancial intermediation and hence the
transformationof ﬁnancial capital and its risks.
This is not an attempt to develop an integrated “meta”theory. The aims are to position
the ideas about banks and FIs and empirical insights relative to alternative relevant
literature and demonstrate their collective power in interpreting the combined phenomena.
A modest aim is to develop a “conversation”between academics adopting different
paradigms, relativeto shared, common, empirical phenomena.“Conceptual connections”can
provide the basis for connected “conversations”and social interactions between many
parties about theory based on differentacademic assumptions and views (paradigms) of the
world (Morgan and Smircich, 1980). Such a conversation is a critical ingredient in theory
As a result, the paper constitutesan embryonic response to Gendron and Smith-Lacroix’s
(2013) call for paradigmatic diversity in ﬁnance theory and Colander et al.’s (2009) call for
“major reorientation in these (ﬁnance research) areas and a reconsideration of their basic
premises”. The paper develops a strategy to build a “house with windows”by proposing
new ways for ﬁnance theory to “take data from the outside world”whilst continuously
recognising “the complexities of the context”(Keasey and Hudson, 2007). It therefore
develops a stream of thought begun by Allen and Santomero (1998) and extended by
Scholtens and van Wensveen(2003),Keasey and Hudson (2007) and Holland (2010).
The new approach can alter the intellectual assumptionson which regulatory actions are
based (Turner, 2009) and provide a new analytical tool for policy makers and regulators.
Regulators must broaden the focus of regulation and regulate change, learning, knowledge
and culture, and not just regulate conduct concerning ﬁnancial transactions. They must
focus on knowledge and social resources,not just ﬁnancial resources in banks and FIs. They
must “stress test”management knowledge, ﬁnancial ﬁrm organisation, culture and
“ﬁnancials”. Theymust do this in an integrated and coherent way.
Section 1 discusses the use of, and problems with, traditionalﬁnance theory in the ﬁeld of
banks and FIs. Section 2 outlines a change strategy for research and building theory about
banks and FIs and their agents. This forms a new basis for explaining banks and FIs and
addressing problems. Section 3 develops an “empirical narrative”for banks and FIs based
on ﬁeld research. Section 4 outlines an embryonic“behavioural theory of the ﬁnancial ﬁrm”
(BTFF). This is based on literature about change and evolution, intellectual capital (IC),
management theory, theory of the ﬁrm and sociology of ﬁnance literature, matched to
empirical phenomena. In Section 5, the ideas from the BTFF are “connected to”speciﬁc
ﬁnance theories of ﬁnancial intermediation. BTFF and “connections”to FTFI must have
responsive, forward-looking elements to create a robust conceptual framework for varying
change conditions. If managers, regulators and academics wish to exploit FTFI, they must
be aware of such dynamics and not use a static version of FTFIby itself. Section 6 explores
how regulators and research councils can use such ideas to drive forward a new change
strategy for research and theory construction, and outlines implications of the paper for
regulation. Section7 summarises the paper.