Responsibility and performance relationship in the banking industry

Abstract

We study the relationship between financial performance and responsibility in the banking industry. Given the wide diversity in business models and operations, this relationship needs to be studied at the level of specific industries. We contribute to the debate about financial and social performance in the banking industry by using highly detailed responsibility and financial performance information, which helps to understand why this relationship exists and how the relationship evolves over time. We rely on a diverse international sample for the period 2002–2015 and use a wide range of financial performance measures next to various specific indicators for corporate governance, environmental, and social performance. By using simultaneous equation system estimations to address the causality between financial performance and responsibility, we find that the Tier-1 capital adequacy ratio is significantly and positively associated with responsibility indicators. As such, stronger institutions appear to be able to act in a more responsible manner and such responsibility signals banks’ health. We also establish that the global financial crisis did have a profound impact on the finance-responsibility nexus. We show that there are changes in the underlying relationships in this nexus during the post-crisis period compared to the pre-crisis period. Furthermore, such changes are different between countries with high and low income, civil and common law, single and multiple supervision authorities, and central bank and non-central bank supervision.