Can a pro-public orientation explain the holding of capital by G-SIBs?

Abstract

Purpose: We investigate the correlation between capital structure and a set of, mostly, standard capital structure determinants for a unique sample: Global Systemically Important Banks (G-SIBs).Design/methodology/approach: We augment the standard set of regression determinants with a proxy measure of pro-public orientation (DataStream’s Refinitiv Environmental, social and governance [ESG] scores). We expect to find that a more pro-public orientated G-SIB holds more capital. This is because very large and systemic banks underpin the functioning of society. The public, therefore, has a direct interest in bank safety with a better capitalised bank being a safer bank. On the other hand, shareholders of a safer bank suffer because of lower profitability.Findings/results: Initial results indicated no relation between pro-public orientation and bank leverage; however, further analysis showed that bank leverage decreases as the governance component score increases. This suggests that the governance of G-SIBs is important for financial stability. Bank size was found to have no intermediation effect on the relationships, implying that our results are not because of a clustering among the largest banks. Correlations between the control variables and bank leverage provide support for the argument that bank leverage is not solely determined by regulations.Originality/value: We extend recent work on social ratings and capital structure in non-financial firms to banks. Our results provide further support for the proposition that the drivers of the capital structures of non-financial firms also determine those of banks, weakening the argument that capital regulation is the sole determinant of bank capital structures. Our sample focuses attention on a core financial decision of very important, if not the most important, players in the global economy.