Bank CEO materialism, corporate culture and risk

We examine the influence of bank CEOs on the risk culture of banking organizations. We posit that materialistic CEOs, as evidenced by the ownership of luxury goods, will exhibit a greater proclivity for promoting aggressive risk-taking cultures characterized by weaker risk control environments and more extreme lower tail risk relative to non-materialistic CEOs. We document that the proportion of banks run by materialistic CEOs increased significantly surrounding adoption of the Gramm–Leach–Bliley Act in 1999, both in absolute terms and relative to non-financial firms. Of all industries, banks had the lowest proportion of materialistic CEOs in 1994 at 44% (equivalent to Utilities), and the highest proportion of 64% in 2004. Then, using an index reflecting the strength and independence of a bank’s risk management function (RMI), we find that the RMI is significantly lower for banks with a materialistic CEO, and that the RMI significantly increases after a non-materialistic CEO replaces a materialistic CEO and decreases after a materialistic CEO succeeds a non-materialistic one. We also find that banks with materialistic CEOs have significantly more downside tail risk relative to the banks with non-materialistic CEOs, where the difference in tail risk the between groups increased significantly during the recent crisis. Finally, we provide evidence that non-CEO executives in banks with materialistic CEOs have a high propensity to exploit inside trading opportunities around government intervention during the financial crisis relative to executives at banks with frugal CEOs. This is consistent with the influence of CEO type propagating through a corporate cultural channel.