Institutional Isomorphism and Systemic Risk in Financial Intermediaries: Implications for Public Policy
The traditional tools policy makers use in an effort to decrease risk in financial intermediaries have influenced norm creation in the industry. The balance sheets of banks continue to converge as they are subjected to not just regulatory coercive pressures described by DiMaggio and Powell (1983), but also to powerful mimetic processes as a response to uncertainty and normative pressures through the social closure of elite finance professions. When viewed on an individual basis, as policy makers have historically considered intermediaries, these banks appear to have lower risk-levels and are safer institutions more able to deal with financial shocks in the presence of their maturity mismatch. However, the overarching concern from a public-interest perspective is systemic risk rather than firm-level risk. When all institutions in the economy look and behave similarly as a result of isomorphic processes, systemic risk increases, even while firm-level risk may decrease. This paper highlights the role of institutional isomorphism in the recent financial crisis, constructs a model for isomorphic pressures in finance, and underlines relevant concerns for policy makers. Regulators must consider the negative impacts of isomorphic processes in the financial industry as we move forward from the financial crash and industry regulation remains on the political agenda.