Individualism, formal institutional environment and bank capital decisions

Mohammad Bitar and Amine Tarazi
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Mohammad Bitar: Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom., Nottingham University Business School, University of Nottingham, Jubilee Campus, Nottingham NG8 1BB, United Kingdom.

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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 2 (search for similar items in EconPapers)
Date: 2020-10-12
New Economics Papers: this item is included in nep-ban
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Journal Article: Individualism, formal institutional environments, and bank capital decisions (2022)
Working Paper: Individualism, formal institutional environments, and bank capital decisions (2022)
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