Bank capital, liquidity creation and the moderating role of bank culture: An investigation using a machine learning approach

Abstract

This empirical study investigates whether a strong bank culture may help strengthen, weaken, or have no effect on the relationship between regulatory capital and liquidity creation. Using a machine learning approach and banks’ 10-K reports, we first measure the corporate culture of selected bank holding companies (BHCs) in the United State (U.S.) over the period between 1995 and 2019. We find that bank culture does affect the link between regulatory capital and liquidity creation. In particular, while we find that regulatory capital has a negative impact on bank liquidity creation, a strong culture in a bank weakens this negative association. We also find that an increase in asset-side liquidity creation is the main channel through which bank culture exerts its moderating role. Finally, our results are largely driven by smaller banks, banks with a more traditional funding structure and more profitable banks. The results of this study suggest that regulators should consider bank culture as being a crucial element in the monitoring approach when designing bank regulation and supervision.