Individualism, Formal Institutional Environment and Bank Capital Decisions

45 Pages Posted: 27 Nov 2020

See all articles by Mohammad Bitar

Mohammad Bitar

Nottingham University Business School; University of Nottingham

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science

Date Written: September 15, 2020

Abstract

We examine the effect of informal institutional environment on bank capital decisions worldwide as well as within the United States at the state level. Specifically, we focus on individualism and based on a sample of 7,034 banks in 68 countries, we establish three major findings: First, individualism is negatively and significantly associated with bank regulatory capital, an association which is independent of the influence of formal institutional environment per se. Second, effective legal enforcement magnifies the negative effect of individualism on bank regulatory capital. Finally, focusing on a single country, the United States, we also find that banks in individualistic states hold less regulatory capital than banks in collectivist states and the effect of individualism is magnified with effective legal enforcement at the state level. Our findings suggest that individualism serves as a constraint on regulators, as any given regulatory guidelines or formal institutional factors will operate very differently depending on the informal institutional environment.

Keywords: Individualism, formal institutional environment, legal enforcement, regulatory capital

JEL Classification: G21, G32, K12, M14

Suggested Citation

Bitar, Mohammad and Bitar, Mohammad and Tarazi, Amine, Individualism, Formal Institutional Environment and Bank Capital Decisions (September 15, 2020). Available at SSRN: https://ssrn.com/abstract=3709448 or http://dx.doi.org/10.2139/ssrn.3709448

Mohammad Bitar (Contact Author)

Nottingham University Business School ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

University of Nottingham ( email )

Nottingham, Québec
Canada

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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