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Sustainability and bank risk

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Scholtens_PalgraveComms_Sustainability_CC.pdf (452.5Kb)
Date
10/09/2019
Author
Scholtens, Lambertus Johannes Regnerus
Van 't Klooster, Sophie
Keywords
Banking
Default risk
Systemic risk
Sustainability
Europe
HG Finance
E-DAS
SDG 8 - Decent Work and Economic Growth
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Abstract
Banks play a key role in society and are crucial for economic development. Existing literature finds a positive association between bank performance and sustainability, but tends to neglect the risk dimension. As human-driven processes interact with global social-ecological connectivity and exhibit cross-scale relationships, we investigate whether sustainability affects banks’ individual default risk and their systemic risk, i.e., their contribution to the risk of the financial system. As banks are financial intermediaries and there is no direct measure of their sustainability, we proxy for sustainability with banks’ performance on environmental, social, and governance attributes, especially their policies and performance. We control for relevant bank, market and country characteristics. It shows that higher sustainability scores of banks significantly associate with lower default risk. We also establish that outperformance on sustainability reduces banks’ contribution to systemic risk. Thus, it appears that banks’ sustainability performance can spill over to the financial system. This implies sustainability is material for banks and their supervisors. Accounting for sustainability can augment bank risk management and prudential policy decision making, and provide guidance as to how to finance a transition towards an economic system that effectively internalizes externalities.
Citation
Scholtens , L J R & Van 't Klooster , S 2019 , ' Sustainability and bank risk ' , Palgrave Communications , vol. 5 , no. 1 , 105 , pp. 1-8 . https://doi.org/10.1057/s41599-019-0315-9
Publication
Palgrave Communications
Status
Peer reviewed
DOI
https://doi.org/10.1057/s41599-019-0315-9
ISSN
2055-1045
Type
Journal article
Rights
© The Author(s) 2019 This article is licensed under a Creative CommonsAttribution 4.0 International License, which permits use, sharing,adaptation, distribution and reproduction in any medium or format, as long as you giveappropriate credit to the original author(s) and the source, provide a link to the CreativeCommons license, and indicate if changes were made. The images or other third partymaterial in this article are included in the article’s Creative Commons license, unlessindicated otherwise in a credit line to the material. If material is not included in thearticle’s Creative Commons license and your intended use is not permitted by statutoryregulation or exceeds the permitted use, you will need to obtain permission directly fromthe copyright holder. To view a copy of this license, visithttp://creativecommons.org/licenses/by/4.0/
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  • University of St Andrews Research
URI
http://hdl.handle.net/10023/18474

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