TY - JOUR

T1 - Business model and ESG pillars: The impacts on banking default risk

AU - Palmieri, Egidio

AU - Ferilli, Greta

AU - Altunbas, Yener

AU - Stefanelli, Valeria

AU - Geretto, Enrico Fioravante

PY - 2024/1/1

Y1 - 2024/1/1

N2 - The recent banks’ failures have highlighted the importance of improving banking sector supervision, emphasizing the need to adopt a holistic approach to risk assessment based on an evaluation of a bank's business model (BBM) that combines financial (e.g., bank’s balance data) and non-financial information (e.g., bank’s ESG performance). In this study, we explore the joint effect of BBM and their environmental (ENV), social (SOC), and governance (GOV) pillars performance on banks’ riskiness profile. The study uses a sample of 639 EU banks from 2013 to 2022 and applied a random effects model. Our findings suggest wholesale and retail banks could mitigate default risk, enhancing their ENV pillar performance. Differently, investment banks are encouraged to improve their governance best practices and structure to take advantage in terms of riskiness reduction. These results remain consistent after a series ofrobustness tests, including the 2SLS model and the Arellano coefficient estimation. Our paper offers practical implications for banking supervisory authorities and practitioners, encouraging to adopt a diversified ESG investment strategy according to bank-specific business models.

AB - The recent banks’ failures have highlighted the importance of improving banking sector supervision, emphasizing the need to adopt a holistic approach to risk assessment based on an evaluation of a bank's business model (BBM) that combines financial (e.g., bank’s balance data) and non-financial information (e.g., bank’s ESG performance). In this study, we explore the joint effect of BBM and their environmental (ENV), social (SOC), and governance (GOV) pillars performance on banks’ riskiness profile. The study uses a sample of 639 EU banks from 2013 to 2022 and applied a random effects model. Our findings suggest wholesale and retail banks could mitigate default risk, enhancing their ENV pillar performance. Differently, investment banks are encouraged to improve their governance best practices and structure to take advantage in terms of riskiness reduction. These results remain consistent after a series ofrobustness tests, including the 2SLS model and the Arellano coefficient estimation. Our paper offers practical implications for banking supervisory authorities and practitioners, encouraging to adopt a diversified ESG investment strategy according to bank-specific business models.

U2 - 10.1016/j.irfa.2023.102978

DO - 10.1016/j.irfa.2023.102978

M3 - Article

VL - 91

JO - International Review of Financial Analysis

JF - International Review of Financial Analysis

SN - 1057-5219

IS - 1

M1 - 102978

ER -