The Effects of Financial Crisis on the Organizational Reputation of Banks

[We’re pleased to welcome authors Mario R. Englert of Lauda Dr. R. Wobser GmbH & Co. KG, Christopher Koch of the University Mainz, and Jens Wüstemann of the University of Mannheim. They recently published an article in Business & Society entitled “The Effects of Financial Crisis on the Organizational Reputation of Banks: An Empirical Analysis of Newspaper Articles,” which is currently free to read for a limited time. Below, they reflect on the impact and innovations of this research:

What motivated you to pursue this research?

In the financial crises, the public heavily criticized banking organization. In particular, we observed that some banks were more harshly criticized than others despite having a similar exposure to the financial crisis. This perceived mismatch of blame allocation motivated us to investigate what characteristics of banking organizations are associated with higher levels of blame and, thus, larger losses of organizational reputation during the financial crisis. Thereby, we also wanted to provide suggestions for a “winning strategy” to overcome such a difficult situation (for which also many banks are – even today – still looking for).

Were there any specific external events—political, social, or economic—that influenced your decision to pursue this research?

Clearly, the financial crisis and the strong public attention in the aftermath of the crisis influenced our decision to follow this stream of research. The public pressure was ubiquitous coming along with fundamental shifts in institutional economics. This situation has led to changes of organizational structures and business models of financial institutions as well as new regulatory conditions, with new and revised laws (e.g., the “Single Rulebook” within the EU) and regulatory institutions (e.g., the foundation of the “Single Supervisory Mechanism” in the Euro Area). The following quest for the right external response of banks (e.g., the proclamation of cultural change) that was observable across all media channels further influenced us to follow this research.

What has been the most challenging aspect of conducting your research? Were there any surprising findings?

Data gathering, data sampling, and data analyses were clearly one of the main challenges to conduct our research. We wanted to investigate the public opinion over time with regards to a coherent and powerful sample leaving us with quite a demanding task to get and compile the necessary information. Therefore, we hand-collected a consistent sample of newspaper articles covering the entire German market (hence, we included regional and national newspapers across the entire geography of the country) for an eight year period. Using semantic analyses based on pre-defined as well as self-compiled semantic dictionaries, we came up with a powerful sample and interesting results. Besides the results discussed in the paper, we also observed some surprising patterns. For instance, we observed that some individual savings and mutual banks (although being heavily invested in the US subprime market) gained on public reputation during the financial crisis (leading to a hypothesis that there was a thinking among the public that “if there are so many ‘villains’ out there, there must also be some [local] ‘heroes’”). It has also been fascinating to see that we could identify systematic results in the individual newspaper’s stance towards banking organizations (not reported in the paper). For example, newspapers geographically close the banking organization’s headquarters reported more positively about it. Further, newspapers with a left-wing readership took generally a more negative stance towards the banking industry in general.

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The Cost of Overcoming Profit Loss

While there have been many capitalistic strides to overcome the profit losses between the 1950s and the 1970s, there’s been a downward effect in households. Dr. Fred Moseley at Mount Holyoke College examines and explains this phenomenon in his article,”The U.S. Economic Crisis: From a Profitability Crisis to an Overindebtedness Crisis,” published in Review of Radical Political Economics.

The abstract:

This paper argues that the fundamental cause of the current economic crisis in the U.S. economy was a significant long-term decline in the rate of profit from the 1950s to the 1970s. Capitalists responded to this profitability crisis by attempting to restore their rate of profit by a variety of strategies, including: wages and benefit cuts, inflation, “speed-up” on the job, and globalization. These strategies have largely restored the rate of rrpeprofit, but have resulted in stagnant real wages for workers for decades. As a result, household indebtedness has increased to unprecedented levels and must be substantially reduced in order to make possible a sustainable recovery.

Read the full article here, and don’t forget to sign up for e-alerts to stay up-to-date on the latest from RRPE!

Book Review: Sociology of the Financial Crisis

In the latest issue of Administrative Science Quarterly, Peer C. Fiss of the University of Southern California published a book review of “Markets on Trial: The Economic Sociology of the U.S. Financial Crisis,” edited by Michael Lounsbury and Paul M. Hirsch:

As the most recent in a long line of market crashes, the devastating financial crisis of 2008 has been the focus of a number of sensemaking attempts, including several highly visible works by journalists such as Lewis (2010) and Sorkin (2009). Most of these works seek to construct a coherent perspective of the financial meltdown, aiming to provide the reader with an authoritative narrative. Markets on Trial: The Economic Sociology of the U.S. Financial Crisis takes a different approach. Starting with a commitment to economic sociology, this book brings together a diverse set of perspectives that are applied to a number of different aspects of the crisis along with the larger, seismic shifts that preceded it.

Click here to read on and here to read more book reviews from Administrative Science Quarterly.

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Soft Budget Constraints and Predatory States

Mehrdad Vahabi, University of Paris 8, published “Soft Budget Constraints and Predatory States” on February 3rd, 2012 in the Review of Radical Political Economics. To view other OnlineFirst articles, please click here.

The abstract:

The concept of the soft budget constraint (SBC) was initially formulated by economist Janos Kornai in the context of socialist economies. I argue that the SBC can be regarded as the political economy of a predatory state in both the so-called socialist and capitalist economies. The hard budget constraint (HBC) is not related to an ideal competitive market economy but to a household level budget constraint, particularly by salaried members of the population in both types of economies.

To learn more about the Review of Radical Political Economics, please follow this link.

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