Abstract
The financial crisis seriously damaged the reputation of the banking sector, as well as its profitability and risk of insolvency, which led many banks to adopt a sustainable approach aimed at balancing long-term goals with short-term performance pressures. This article analyses how sustainable banking practices affect the profitability and the insolvency risk of banks. Moreover, we examine how sustainable strategies determine the effects of market power and efficiency on bank profitability. We used a two-step System-GMM to analyze an unbalanced panel of 1236 banks from 48 countries over the period 2015–2019. We found that sustainable banking practices increased profitability, and market power was an important determinant of profitability among conventional banks, but not among sustainable banks. Higher levels of cost scale efficiency led to greater profitability for both sustainable and conventional banks. However, there was no significant relationship between sustainable banking and insolvency risk. These results indicate that the traditional determinants of bank profitability are not relevant in explaining the superior profits of sustainable banks, which suggests the emergence of a new paradigm related to sustainability among the drivers of bank profitability.
Highlights
Sustainable strategies do not have a significant impact on insolvency risk. These results show that the traditional determinants of bank profitability are not relevant in explaining the superior profits of sustainable banks, which suggests the emergence of a new paradigm related to sustainability among the drivers of bank profitability
As we proposed in our Hypothesis 1 (H1) in the Introduction section of the article, we expect that sustainable banking practices will weaken the market power hypothesis
The financial crisis had strongly adverse effects on the image and confidence of the banking sector, which led many banks to implement sustainable business strategies to improve their reputation. These strategies might affect the relationship between market power, efficiency, and profitability, as well as the relationship between sustainable banks and risk
Summary
The first contribution of the article is to analyze how sustainable practices determine the effects of market power and efficiency on bank profitability. The analysis of these aspects is very important because the financial crisis led banks to adopt sustainable activities; it reduced the profitability of banks, increased the concentration of the banking industry due to mergers and acquisitions, and strengthened the differences between more and less efficient banks because the former could reduce costs, avoid excessive delinquency, and get better financing conditions [7]. Sustainable business models offer competitive advantages for banks, such as better reputation and brand differentiation, which attracts more loyal customers and increases
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