These results are generally consistent with the existing literature, which finds that banks from regions with higher CSR have higher (lower) bank stability (risk) (Jin et al., 2017). Our study extends Khan et al. 2017), which examines the relationship between household deposits and banking risk. Therefore, our study extends Khan et al. 2017), which show that banks with a high level of household deposits have a higher risk due to aggressive risk-taking behavior.
Research design
Sample construction and data
The existing literature also finds that banks with large capital buffers and large insured retail deposits are stronger and less likely to fail during the GFC (Berger and Bouwman, 2010; Bologna, 2011). As such, we theorize that banks with high CSR have greater financial stability or lower banking risk. We obtain country-level data from the Barth et al and World Bank database, namely Global Governance Indicators19, Global Financial Development20 and Global Development Indicators21.
- Liquidity
- Deposit funding
- Bank stability
- Control variables
We use the natural logarithm of the Z-score (Schaeck and Cihak, 2007; Beck et al., 2013) to measure bank stability. We include annual growth in total assets to account for the impact of business growth, as aggressive expansion can increase risk (Altunbas et al., 2017). We use domestic credit to the private sector as a percentage of gross domestic product (GDP), bank credit to the private sector as a percentage of GDP, and stock market capitalization to GDP to control for the availability of bank credit as well as the structure and maturity of financial markets (Wu and Shen , 2013; Beck et al., 2013).
Construction of the empirical model
The Wealth Index30, produced by the Legatum Institute, is a comprehensive measure of countries' economic, institutional and social performance in achieving material wealth and the well-being of communities. Also, an instrument meets the exclusion condition if it has no correlation with the error term. We also expect the GSCI Social and Prosperity Index to be associated with CSR, as both variables measure the overall well-being of communities, which is consistent with CSR social performance.
Since our sample includes banks from different countries, the norms and values of banks in the same country may be similar. 2019) demonstrate that the environmental and social values of the society in which managers reside influence their decisions. Therefore, we expect that all instruments (EPI, Law, GSCI Social and Welfare Index) will meet the condition of relevance. We also believe that our chosen instruments have no correlation with the error term of the regression model.
Since managers usually align companies' social responsibility activities with society's expectations, we believe that the CSR performance of a firm will reflect a society's environmental and social values (Dyck et al., 2019). As such, the regression error term will not capture country-level social responsibility performance, especially environmental and social performance, which is measured by the instruments. 31The fulfillment of the exclusion condition means that the instrumental variables are not influenced by the dependent variables, the instruments must effect the dependent variables indirectly through the endogenous variable, and the instruments are not correlated with unobservable variables in the model (Jha and Cox, 2015).
To examine the robustness of our findings, we repeat all comparisons using CSR_ES, an alternative CSR measure calculated from Refinitiv's environmental and social data.
Empirical results and discussion
Descriptive statistics and univariate results
The endogeneity test significantly rejects the null hypothesis that CSR (the endogenous variable) is exogenous at the 1% level. Under the Kleibergen-Paap rK LM test, the null that the instruments are not correlated with the CSR is rejected at the 1% level. The Cragg-Donald Wald F-statistics exceed all the critical values, showing that the instruments are robust.
Column (8) of Table 3 shows that the estimated CSR coefficient is quite positive for the ratio of deposits to total assets at the 1% level, which suggests that socially responsible banks are able to attract higher deposits from the population. The endogeneity test rejects the null hypothesis that a particular endogenous variable (CSR) is exogenous at the 1% level. The null that the instruments are not correlated with CSR is significantly rejected at the 1% level by the Kleibergen-Paap rK LM test.
All instruments are strong as the Cragg-Donald Wald F-statistics exceed the critical values at the 5% level. The endogeneity test significantly rejects the null hypothesis that the endogenous variable (CSR) is exogenous at the 1% level. The null that the instruments are not correlated with CSR under the Kleibergen-Paap rK LM test is rejected at the 1% level.
The Cragg-Donald Wald F statistics exceed the critical values at the 5% level, showing that both instruments are strong.
Robustness tests
- CSR_ES (alternative CSR measure)
Among the control variables, the coefficients of the cost-to-income ratio (bank efficiency) and the logarithm of the standard deviation of the return on average equity (earnings volatility) are negatively related to the logarithm of the Z-score (total bank risk). This is expected, as banks with higher efficiency (cost-to-income ratio, -0.004) and more stable earnings (log standard deviation of return on average equity, -0.28) are more stable and exhibit low risk. For bank stability, the estimated coefficient for CSR_ES (column (6)) is positive and statistically significant at the 1% level, supporting our main findings that socially responsible banks exhibit greater (lower) financial stability (total risk).
Translating it into economic proportions, a one standard deviation increase in CSR_ES is associated with a 57.4% improvement in overall bank stability, consistent with the main findings (44.0%) in column (12) of Table 3. All instruments meet statistical requirements for significance and appropriateness as presented in Table 4.
Conclusion
Translating this into economic size, a one standard deviation increase in CSR_ES is associated with a 57.4% improvement in overall bank stability, which is consistent with the main findings (44.0%) in column (12) of Table 3. All instruments meet the statistical requirements for adequacy and appropriateness as presented in Table 4. 2017), which find that banks with high levels of household deposits have higher risks due to aggressive risk-taking behavior such as loan expansion. We confirm that the sample banks meet the relevant country's regulatory liquidity requirements. Therefore, we attribute these findings to the good reputation and trust of stakeholders due to the superior performance of corporate social responsibility, which allows banks the flexibility and capacity to maintain an adequate level of liquidity and obtain retail deposits, which improves their stability.
These findings are largely consistent with Statman (2007) and Jin et al. 2017) who find that socially responsible firms show higher stability (lower bank risks). Our results are also consistent with Drechsler et al. 2018) who find that retail deposits are a relatively stable long-term financing that insulates banks from interest rate risk. We extend Drechsler et al. 2018) by showing that high CSR banks are able to attract and retain retail deposits, enabling them to improve value and stability.
Our findings have important policy implications as this study provides a clear understanding of how CSR relates to the two dimensions of liquidity, viz. we suggest that regulators should design a regulatory framework to encourage banks to exercise good social responsibility to improve their liquidity management, as well as to enhance bank stability. As some of the countries in our sample do not have a stable net funding ratio and liquidity coverage ratio, we have not used these Basel III liquidity measures for our analysis.
Future research using the Basel III liquidity indicators (net stable funding ratio and liquidity coverage ratio) would be useful to further our understanding of this topic.
Variable definitions, measurement, and sources
It refers to “the sum total of the social stability and well-being (perceived or real) of the entire population. It reflects perceptions of the extent to which a country's citizens can participate in choosing their government, as well as freedom of expression, freedom of association and a free media." the credibility of the government's commitment to such policies.”
Indicator database Req Quality of regulations “reflects the perception of the government's ability to formulate and implement good regulations. policies and regulations that enable and promote private sector development.” Corrupt governance of corruption “reflects perceptions of the extent to which public power is exercised for private gain, including both minor and major forms of corruption, as well as the 'capture' of the state by elites and private interests.”. Total assets of the three largest commercial banks as a share of total commercial bank assets.
The financial corporations include monetary authorities and depository money banks, as well as other financial corporations where data is available (including corporations that do not accept transferable deposits but do undertake obligations such as time and savings deposits). Source: World Bank - https:// databank.worldbank.org/source/world-development-indicators). The degree of restrictions to engage in securities business, ranging from 1 (unrestricted) to 4 (prohibited). Source: http://faculty.haas. berkeley.edu/ross_levine/Regulation.htm).Aggregate is based on constant 2010 US GDP is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products not.
GDP is the sum of gross value added by all resident producers in the economy plus any taxes on the product and minus any subsidies not included in the value of the products.
Retrieved from https://www.cnbc.com sustainable-investing-is-set-to-surge-in-the-wake-of-the-coronavirus-pandemic.html. Greed or good deeds: Examining the relationship between corporate social responsibility and financial performance US corporate social performance and its relationship to corporate financial performance: International evidence in the banking industry.
The relationship between corporate social responsibility and shareholder value: An empirical test of the risk management hypothesis. In financial sector assessment: A handbook. https://www.imf.org/external/pubs/ft/fsa/eng/pdf/ch02.pdf. https://www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustai nability-at-ifc/company-resources/sustainable-finance/sbn. Social capital, trust and firm performance: The. value of corporate social responsibility during the financial crisis.
Retrieved from https://www.refinitiv.com/content/dam/marketing/en_us/documents/methodology/esg-scores-methodology.pdf. To engage or not to engage in corporate social responsibility: Empirical evidence from the global banking sector. A preliminary research paper on the business models of the founding member banks of the Global Alliance for Banking on Values.
Retrieved from https://www.unepfi.org/banking/bankingprinciples/. 2008) Letter from Chairman Cox to the Basel Committee in Support of New Guidelines on Liquidity Management. One of its basic steps is to perform data centering, which is to subtract the mean of a dimension from itself so that each of the dimensions in the data set has a mean of zero (Wikipedia, 2020). This table presents the results of a two-stage least squares test, where the dependent variables are measures of liquidity (liquidity ratio), deposit funding (ratio of deposits to total assets) and bank stability (log of the Z score ).
