This study examines the value of language, as an important dimension of culture, to banks. Based on a unique hand-collected dataset of Chinese commercial banks and a county-level dialect dataset, we find that a higher degree of dialect similarity between the chairman and the CEO is associated with a higher return on assets, a higher return on equity, and a lower cost-to-income ratio, suggesting that dialect similarity plays a positive role in improving bank performance. Further analyses show that dialect similarity has no significant association with bank risk and bank expansion. In addition, it does not cause higher CEO pay or lower pay-performance sensitivity. These results indicate that dialect similarity does not lower the monitoring effectiveness. We also investigate the relation between dialect similarity and banks’ agency costs and the results show that dialect similarity reduces agency costs significantly. Our findings are robust to alternative measures of dialect similarity, the separation of the “dialect level effect”, and the potential endogeneity of dialect similarity.

This study resolves a puzzle in the banking literature: why do an increasing number of countries adopt a deposit insurance scheme (DIS) while prior studies have shown that it increases the likelihood of banking crises? Using a dataset of 64 countries over the period 1970–2009, our study shows that the adoption of a DIS is associated with a 2.0–4.7 percentage points higher likelihood of banking crises (the “direct effect”), while it is associated with a 10.1–11.1 percentage points lower likelihood of non-banking financial crises (the “spillover effect”). Since the “spillover effect” is larger than the “direct effect”, a DIS actually increases overall financial stability. Additionally, we analyze the mechanisms through which a DIS affects financial crises. First, we highlight the existence of the implicit guarantee and examine its interaction with an explicit DIS. Second, we investigate the substitution effect between banking crises and non-banking crises.