The Spirit of the Law Over its Letter: The Role of Culture and Social Norms in Shielding Cooperative Banks from Systemic Shocks

TOPIC 15-STAGE 3-MACRO The abstract relates to a paper The macroeconomic impact of banks’ misconduct led users of financial services to be deterred from using the system to the detriment of market integrity and called upon... [ view full abstract ]

TOPIC 15-STAGE 3-MACRO
The abstract relates to a paper

The macroeconomic impact of banks’ misconduct led users of financial services to be deterred from using the system to the detriment of market integrity and called upon policy makers and supervisors to turn to “culture” as a means to regain public trust and eventually guarantee the stability of the real economy. From this vantage point, the crisis showed that culture did indeed matter, as it can significantly influence the effectiveness of decision-making process and, thus, the risk appetite/profile of banks.
Culture and behaviour have shown to be the main threat to financial stability policy makers and supervisors have currently to cope with. What is already clear is that culture is an important subject to focus on when supervising banks. Nevertheless, the problem is that current academic thinking lacks both clarity and expertise on what “culture” really is and how it should be implemented by banks.
This paper addresses this gap by exploring the illustrative case of cooperative banks.
Extensive empirical evidence shows that cooperative banks turned out to be more stable than commercial banks for several reasons related to the ownership structure and the business model. However, the extant literature lacks to take into account whether cooperative values (i.e. solidarity; mutualism; proximity; social commitment) contributed in motivating employees to do the right thing and to steer away from reckless behaviour. The investigation brings to the fore the main question of whether and how cooperative banks’ values and culture played a role in ensuring the soundness and efficiency of risk-taking policies. In doing so, the research will elaborate upon Spear’s model of “cooperative advantage” which emphasises cooperatives’ particular ability to perform better by means of the “values” and “social cues” the cooperative model is built upon. Such values, the argument goes, in particular lead to resilient and flexible organizations that are both capable of stabilising a community economy and of getting over negative economic outlook or systemic distress. In the credit sector, these values are indeed embedded in the ways cooperatives do banking, resulting in a reinforcing mechanism between the letter of the cooperative law (juridical form of cooperative banks) and the spirit behind such letter (culture).

Andrea Minto
Assistant Professor of Law and Economics at Utrecht University
Adjunct Professor of Banking and Financial Market Law at Ca’ Foscari University of Venice
BIS Research Fellow at the Bank for International Settlements