Responsibility and Performance Relationship in the Banking Industry

Gonenc Gonenc,Scholtens Scholtens

doi:10.3390/su11123329

Gonenc Gonenc, Scholtens Scholtens

Open Access

https://doi.org/10.3390/su11123329

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Abstract

We study the relationship between financial performance and responsibility in the banking industry. Given the wide diversity in business models and operations, this relationship needs to be studied at the level of specific industries. We contribute to the debate about financial and social performance in the banking industry by using highly detailed responsibility and financial performance information, which helps to understand why this relationship exists and how the relationship evolves over time. We rely on a diverse international sample for the period 2002–2015 and use a wide range of financial performance measures next to various specific indicators for corporate governance, environmental, and social performance. By using simultaneous equation system estimations to address the causality between financial performance and responsibility, we find that the Tier-1 capital adequacy ratio is significantly and positively associated with responsibility indicators. As such, stronger institutions appear to be able to act in a more responsible manner and such responsibility signals banks’ health. We also establish that the global financial crisis did have a profound impact on the finance-responsibility nexus. We show that there are changes in the underlying relationships in this nexus during the post-crisis period compared to the pre-crisis period. Furthermore, such changes are different between countries with high and low income, civil and common law, single and multiple supervision authorities, and central bank and non-central bank supervision.

Highlights

This study investigates if and how responsibility in banking interacts with financial performance
We find that the global financial crisis left its mark on the interaction between financial and responsibility performance in the banking industry
To find out about the finance-responsibility nexus in the banking industry, we first briefly refer to the studies that relate social and financial performance; we introduce the literature that focuses on this relationship within the banking industry and position our study before we present the hypotheses that will be tested in the remainder of this manuscript

Summary

Introduction

This study investigates if and how responsibility in banking interacts with financial performance. It allows us to use bank-specific measures of financial performance, such as capital ratios and net interest margins, and relate these to banks’ performance on governance, social and environmental characteristics This results in a richness of insights as to how responsibility and financial performance relate; such richness usually gets lost when multiple industries are investigated at the same time. As financial intermediaries manage risks and funds on behalf of other households, it is crucial they have a complete and detailed overview of what firms do and what the effects are Both their financial structure and their business model set them apart from other types of business, which motivates our industry-specific analysis of the banking industry (next to the fact that several studies advocate the case for industry-specific analysis of the social and financial performance relationship, see [2])

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