Bank Interest Margin and Green Lending Policy under Sunflower Management

Abstract

Sunflower management is a type of management style in which a chief executive officer (CEO) ignores information and attempts to confirm the board’s prior beliefs. The CEO’s accommodating behavior may reduce incentive conflicts but also stimulate diligent board monitoring. The present article aims to develop a contingent claim utility model to investigate the effect of green lending on bank spread behavior and board monitoring under sunflower management. The principal advantage of the contingent claim utility approach is the explicit treatment of uncertainty and diligent board monitoring, which play a prominent role in discussions of intermediary behavior. Additionally, banks may earn goodwill from a green lending policy, thus yielding environmental improvements. In this study, we explore the goodwill effect on the bank’s interest margin determination and board monitoring. We use the comparative statistics method to analyze the result of changes in the theoretical model’s exogenous parameters. Moreover, we use empirical data as a baseline for numerical simulations to explain the comparative statistics. Our main findings are that increasing green lending reduces interest margins and enforces diligent board monitoring. The increase in goodwill garnered from improvements to the bank’s green lending reputation was found to enhance the interest margins but ease active board monitoring. From these results, we outline implications such as implementing intangible goodwill asset accumulation from bank customers’ green awareness via green lending publicity that increases the bank interest margin under sunflower management, thereby affecting banking stability.