Bank Safety-oriented Culture and Lending Decisions
57 Pages Posted: 8 Jun 2021 Last revised: 14 Jul 2022
Date Written: June 5, 2021
In this study, we investigate the effects of bank safety-oriented culture on loan contracts. We propose a new measure that derives a bank’s safety-oriented culture from its business model. We provide several validation tests to confirm that our measure can represent the safety-oriented culture of banks. Our empirical results show that banks with a safety-oriented culture increase the probability of signing a contract with low risk borrowers and that they charge lower loan spreads. We also find that these banks ask for more loan covenants to protect their creditor’s rights. Finally, banks with a safety-oriented culture suffer less from borrowers’ defaults and have higher market responses around the dates of loan announcements. Also, our findings reject the alternative hypothesis that banks with a safety-oriented culture only accept less risky lending due to their conservative risk attitude, thus destroying market value for banks.
Keywords: Bank culture, bank loan contracts, credit risk, default event, and market response
JEL Classification: G21, G24, G32, G34
Suggested Citation: Suggested Citation