Cultural influence on the banking system

Victoria Coates | Hamilton, ON | Posted on October 26, 2011

While the recent financial crisis is a global phenomenon, it has not affected all countries equally. Why have some suffered more severely than others? Differences in national culture appear to have contributed to this trend.

Giri Kanagaretnam, associate professor of accounting and financial management at the DeGroote School of Business, has co-authored a study published in the Journal of International Business Studies that explores the effects of national culture on bank earnings around the world.

The study reviewed banks from 39 countries during the pre-financial crisis period from 1993-2006 and examined four dimensions of national culture that may influence excessive risk taking: individualism, masculinity, uncertainty avoidance, and power distance. The research focused on whether and how these various dimensions of national culture influence the earnings of banks.

The study revealed that in societies that promote risk taking behaviour with high individualism, high masculinity, and low uncertainty avoidance, banks tend to manage earnings using the strategy known as bench-mark beating. They aim to meet or just beat the previous year's earnings. Banks in societies without these cultural factors are less likely to manage their earnings with this approach. These results imply that culture has an important influence on financial strategies.

Kanagaretnam also focused on the effect of differences in national culture on the earnings of banks during the recent financial crisis from 2007 to 2008. Cultures that encourage higher risk-taking experienced more bank troubles in the form of larger losses. There were considerably larger adverse effects on banks in certain countries such as the United Kingdom and the United States, compared to others including Australia, Canada, and Singapore.

"When you look at a country like the United States, with its highly individualistic society, you can see that the culture makes people more likely to take risks, also making them more likely to suffer large losses," says Kanagaretnam. "This may partially explain why the United States was hit so hard during the financial crisis."

Kangaretnam says that other factors, notably regulation, can curb the effects culture has on the earnings quality of banks. For example, while Canada's cultural characteristics share some similarities with the United States' culture, Canada faired much better during the financial crisis because of the stricter regulations in place on the banking system.

"With regulation benefiting countries like Canada, the question has become: should global regulations be put in place to govern the banking systems of all countries?" says Kanagaretnam. "After examining the important relationship between national culture and earnings management of banks, it is clear that regulation is not the answer for every nation. Countries like Singapore, whose culture promotes financial stability, may not need stricter global regulations."

Kanagaretnam will continue to explore the effects of national culture on bank risk-taking while investigating new factors that may also have an influence on the earnings of banks. His research findings can help inform decisions about financial regulations and behaviour, helping to minimize future crises.