Sustainable Banking, Market Power, and Efficiency: Effects on Banks’ Profitability and Risk

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.

The sustainability awareness of banking institutions in Indonesia, its implication on profitability by the mediating role of operational efficiency

“…The results align with Beccalli et al. (2015) and Olmo et al. (2021) that large banks are more capable of making wholesale funding and gaining benefits from economies of scale and economies of scope that allow non-interest income and higher leverage.…”

“…Karyani et al (2019) used the risk governance (RGOV) index with an interval scoring technique but did not consider sustainability. Chih et al (2010) used the KLD rating that was criticized do not reflex the bank's governance system (Bolton, 2013), andOlmo et al (2021) used a dummy variable to distinguish sustainable and conventional banks based on membership in UNEP FIs. With The profitability of sustainable banking these measurements, the result is still limited in explaining the effect of sustainable banking on banks' profitability.…”

Digitainability and Financial Performance: Evidence from the Serbian Banking Sector

“…As far as performance is concerned, in China, research shows that corporate sustainability (CS) and financial performance correlate to each other positively [14], whereas in Islamic banking, the research implies that improvements in sustainability practices add financial value to various stakeholders [15]. The crossregional study shows that sustainable banking practices increase profitability [16], whereas a previous study examining 235 European banks from 2007 to 2016 showed that there is a positive impact of environmental, social, and governance (ESG) issues on performance [17]. Research focusing on 472 global banks by considering the period from 2015 to 2019 shows that ESG initiatives are perceived as strong value-adding mechanisms [18].…”

Modeling employees' skills for sustainable banking services

“…In the same way, City Bank Limited and other banks should know what skills and abilities are suitable for them, the employee skills they need more of, and so on. With proper research on necessary employee skills, it is possible to find the right human assets (Torre Olmo et al, 2021 ).…”