Selectivity and Transparency in Social Banking: Evidence from Europe

Abstract

How do social banks signal their social commitment to motivated funders? This paper hypothesizes that two main channels are used, namely selectivity and transparency. We test these predictions using a rich dataset comprising balancesheet information on 5,000 European banks over the 1998-2013 period. The results suggest that social screening leads social banks to higher project selectivity compared with mainstream banks. Social banks also tend to be more transparent than other banks. However, combining selectivity and transparency can result in excess liquidity. Overall, the empirical findings not only confirm our theoretical hypotheses, but also raise challenging issues on the management of social banks. AbstractHow do social banks signal their social commitment to motivated funders? This paper hypothesizes that two main channels are used, namely selectivity and transparency. We test these predictions using a rich dataset comprising balance-sheet information on 5,000European banks over the 1998-2013 period. The results suggest that social screening leads social banks to higher project selectivity compared with mainstream banks. Social banks also tend to be more transparent than other banks. However, combining selectivity and transparency can result in excess liquidity. Overall, the empirical findings not only confirm our theoretical hypotheses, but also raise challenging issues on the management of social banks.

The Business Model of Social Banks

“…SBs have higher deposit‐to‐asset ratios and lower loan‐to‐asset ratios than CBs. Cornée et al () argue that this excess liquidity is indirect evidence that SBs adhere to their mission and select their borrowers rigorously. Nevertheless, high selectivity may be costly both financially and from a reputational point of view because it constrains the bank’s ability to transform deposits from motivated savers into loans.…”

“…The main commitment devices mobilized by SBs relate to ownership structure and managerial design. Depositors are protected from owners’ opportunism by statutory or self‐designed provisions (San Jose et al ) while managerial strategies include the social screening of borrowers, operational transparency, simple intermediation principles, and reasonable staff compensation (Cornée et al & ; Mykhayliv and Zauner ). The next hypothesis echoes recent evidence from Krause and Battenfeld (, p. 889) that the clients of German SBs have ‘weaker preferences for financial, but stronger preferences for social return than conventional banking customers.’Hypothesis The remuneration of depositors by SBs is at below‐market interest rates: where intdep(x) represent the remuneration of deposits in bank, x ∈ {SB, CB}.…”

Social Banks

“…The combination of ambiguity surrounding their definition and the relatively small size of the sector means, also, that there has been a general lack of academic research into social banking. However, an increasing number of studies are beginning to examine social banks in terms of risk taking, profitability, and efficiency (Weber 2011;Karl 2015;Cornée et al 2016), and several others have looked at social banking from an ethical perspective (Relano 2008;Relano 2015;Climent 2018).…”

“…Adding another element to the credit screening process could, in theory, increase the costs of screening and monitoring. There is limited evidence on this aspect of social screening, but one recent contribution to the research appears to indicate that such costs do not add significantly to total screening costs (Cornée et al 2016).…”

Evolution of Social Banking in the World and in Russia

“…В нем они задействовали отчетность 5000 европейских банков за период 1998-2013 гг. [11]. Ученые пришли к выводу, что банки, осуществляющие социальный банкинг, обладают большей прозрачностью в сво-ей деятельности и селективностью при оказании услуг клиентам, что достаточно очевидно, зная цели социального банкинга.…”