My colleagues and I introduced the concept of cultural capital for financial firms in a white paper in late 2017 as a type of intangible asset that impacts how a firm operates and ultimately performs.1 Cultural capital is an input into a firm’s production process that determines its ability to deliver the products and services that it offers. It is analogous to physical capital like the equipment, buildings and property a firm uses; to human capital, which is the accumulated knowledge and skills of its workers; and to reputational capital, which includes the franchise value or brand recognition of a firm. More broadly, culture can be defined as the shared set of norms within a group that influences decision-making and is evidenced through behavior. 2 Cultural capital is a conceptual way to link a firm’s culture, including its values, assumptions and behavioral norms, to its business outcomes. For financial firms, it is not loss-absorbing in a financial sense like equity capital, but it can be loss-preventing by influencing decisions, behaviors, and outcomes over time. As an intangible asset, we generally see the impact rather than the thing itself. But, its impact can be measured, assessed, and ultimately influenced. In an organization with a low level of cultural capital, for example, behavioral risk is high.
Having started with Mark Twain I want to finish with another quote this time from Santayana: “A man’s memory may …become the art of continually varying and misrepresenting his past, according to his interests in the present.” 1 One lesson from recent events is the need for rigour, balance and transparency in policy making and risk assessment. I hope that the Bank can play a part in that in future as it has in the past. 1  “Reasons and places”, George Santayana. BIS Review 132/2008  5  Chart 1: Financial market liquidity  Chart 2: Household consumption growth: what happened to the boom? Liquidity index 1.0  Percentage changes on a year earlier 10 1973 Q3 1980 Q1 1990 Q3 2008 Q3  0.5 + 0.0  8 6 4  0.5 2  1.0  0  1.5  -2  2.0  -4 -6  2.5 92  94  96  98  00  02  04  06  08  -16  -12  -8  -4  0  4  8  12  16  Quarters  Sources: Bank of England.