The Effect of Institutional Logics on Commercial Banks' Exposure to Market Risk

• In Event: 413 - Section on Organizations, Occupations and Work Refereed Roundtable Session. Table 01. Culture and Organizations
  In Refereed Roundtable 100min: Table 12. Making Markets

Abstract

The 2007-09 financial crisis, which plunged much of the world into a lasting recession that destroyed trillions of dollars in global wealth, prompted renewed attention to the mechanisms through which risk spreads through the financial system. One key mechanism during the financial crisis was the failure of some large U.S. commercial banks, which had become major participants in securities markets. In this paper, I examine the role of two institutional logics—sets of formal and informal rules that provide assumptions about how actors within an organization should achieve goals (Thornton and Ocasio 1999)—used by commercial banks when determining who should make decisions concerning market risk. The agency logic suggests that banks should allow the interests of shareholders to guide decisions about a bank’s exposure to market risk, while the smartness logic suggests that securities traders are best equipped to make decisions about a bank’s trading portfolio. I test the effect of the prevalence of these logics on banks’ exposure to market risk using a panel data set of major commercial banks from 1998-2014. I find no robust evidence that either logic has a significant effect on exposure to bank risk. Future archival analysis will allow for a more detailed picture of how commercial banks make decisions about market risk.

Author

• Joe LaBriola, UC Berkeley