Drivers of Global Banking Stability in Times of Crisis: The Role of Corporate Social Responsibility
| Published date | 01 April 2023 |
| Author | Teng Li,Vu Quang Trinh,Marwa Elnahass |
| Date | 01 April 2023 |
| DOI | http://doi.org/10.1111/1467-8551.12631 |
British Journal of Management, Vol. 34, 595–622 (2023)
DOI: 10.1111/1467-8551.12631
Drivers of Global Banking Stability in
Times of Crisis: The Role of Corporate
Social Responsibility
Ten g Li , Vu Quang Trinh and Marwa Elnahass
Newcastle University Business School, Newcastle University,Newcastle-upon-Tyne, NE1 7RU, UK
Corresponding author email: teng.li@newcastle.ac.uk
This study examinesthe effect of environmental and social (ES) activitieson global bank-
ing stability in the shadow of the COVID-19 pandemic. Using a sample of 244 commer-
cial banks across 52 countries from 2002 to 2020, we provide evidence that during the
global health crisis, banks with higher levels of ES activities are more nancially sta-
ble (i.e. lower credit and liquidity risk exposures). Drawing on social capital and stake-
holder theories, we nd that ES activities increase rm-level social capital and establish
a stakeholder-centred culture within a bank, strengthening social trust and public con-
dence in the bank’s risk oversight. Accordingly, ES activities constrain excessive and
aggressive bank risk-taking during turbulent times when short-termism prevails.Our ad-
ditional analysis reveals that investors value such benecial effects of ES activities. The
ndings offer new insights into the increasingly signicant roles of social capital creation
and stakeholder-centred culture in maintaining banks’ nancial stability.
Introduction
Banks’ aggressive and excessive risk-taking be-
haviours contribute to nancial instability, as
demonstrated during the 2007−2009 global nan-
cial crisis, the European debt crisis and the LI-
BOR1scandal in the United Kingdom (Ashton
and Christophers, 2015; Ivashina and Scharfstein,
2010). Undoubtedly, banks’ unethical behaviours
erode social trust and undermine public condence
in the banking sector’s abilityto allocate economic
resources efciently and contribute to societal ad-
vancement (Claessens, 2017). In response to these
crises, numerous global regulators and local gov-
ernmental authorities have enacted more stringent
policies to strengthen risk oversight in the bank-
ing industry. For example, the Dodd–Frank Wall
Street Reform and Consumer Protection Act in
the United States (Acharya et al., 2011) and the
Financial Policy Committee in the United King-
1LIBOR means London Interbank Offered Rate.
dom (Duncan and Nolan, 2020) were both es-
tablished to identify, monitor and mitigate risks
to nancial stability. At the rm level, banks ap-
ply the Equator Principles2(Scholtens and Dam,
2007; Wright, 2012) and the United Nations Envi-
ronmental Project Finance Initiative (Park, 2012)
to enhance internal risk management and control.
Moreover, an increasing number of banks have in-
corporated corporate social responsibility (CSR)
and codes of ethics into their lending and nancing
decision-making processes by implementing the
ISO 14000 Environmental Management System
and disclosing information regarding CSR perfor-
mance in accordance with the Global Reporting
Initiative (GRI) sustainability reportingstandards
(Scholtens, 2009; Shen et al., 2016; Wu and Shen,
2013).
2Since 2003, certain leading international banks have
adopted the voluntary framework of the Equator Prin-
ciples, which require banks to integrate social and envi-
ronmental risks into projects’ nancing.
© 2022 The Authors.British Journal of Management published by John Wiley & Sons Ltd on behalf of British Academy
of Management.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distri-
bution and reproduction in any medium, provided the original work is properly cited.
596 Li et al.
From the agency theory perspective (Fama and
Jensen, 1983; Jensen and Meckling, 1976), CSR
may represent bank managers’ opportunistic ef-
forts to divert public attention away from previ-
ous unethical behaviours (Jain and Zaman, 2020;
Kotchen and Moon, 2012), to enhance their cor-
porate or personal reputation at the expense of
shareholders (Barnea and Rubin,2010; Shen et al.,
2016; Wu and Shen, 2013). However, social capi-
tal and stakeholder theories suggest that bank ex-
ecutives may intensify CSR to build social capi-
tal and reciprocal trust with relevant stakeholders
and thus maintain a competitive advantage (Azmi
et al., 2021; Chiaramonte et al., 2021). Follow-
ing the latter argument and prior empirical evi-
dence (e.g. Chih, Chih and Chen, 2010; Jin et al.,
2017; Lins, Servaes and Tamayo, 2017), we pro-
pose that a stakeholder-centred internal decision-
making process can constrain banks’ proclivity for
excessive risk-taking at the expense of stakehold-
ers’ interests, thereby preserving global banking
stability in times of crisis.
Prior research has established a variety of insti-
tutional and organizational determinants of bank
risk-taking behaviours, and recent studies empha-
size that a bank’s corporate culture (e.g. work at-
mosphere and environment, and internal manage-
ment style) may be the root cause of excessive risk-
taking and subsequent risk exposure (Delis,Hasan
and Tsionas, 2015; Guiso, Sapienza and Zingales,
2015; Nguyen, Nguyen and Sila, 2019). In par-
ticular, Nguyen, Nguyen and Sila (2019) alluded
to the critical role of a stakeholder-centred cor-
porate culture in guiding bank executives towards
risk-taking decisions that are relatively more pru-
dent (e.g. less reckless mortgage lending). How-
ever, existing literature draws limited attention to
the role of CSR in fostering a corporate culture
that heightens social capital and trust between
banks and their relevant stakeholders, which ulti-
mately is expected to reduce risk exposure and in-
crease bank stability.
CSR literature in nancial sectors is still in its
infancy, and systematic research into the effect
of CSR on global banking nancial stability
remains limited (see Azmi et al., 2021; Chiara-
monte et al., 2021). To address this gap, we extend
the key drivers of global banking stability to
the role of environmental and social (ES) ac-
tivities in explaining banks’ risk exposures to
liquidity and credit risks – two key factors that
contribute to the global banking sector’s nan-
cial stability in the shadow of the COVID-19
pandemic.
This study is focused on banking ES perfor-
mance because of the peculiarities of the bank-
ing sector with respect to CSR practices. Although
banking rms appear to have lower direct ES
impacts relative to their industrial counterparts,3
banks facilitate industrial activities by lending to
rms that may engage in sociallyirresponsible cor-
porate behaviours such as pollution, manufactur-
ing of hazardous products and human rights vi-
olations (Kotchen and Moon, 2012; Thompson
and Cowton, 2004). Anecdotal evidence suggests
that banks havebeen accused of facilitating uneth-
ical social behaviours such as corruption, bribery
and money laundering, in addition to other du-
bious lending, investment and asset management
practices (Altunba¸s, Thornton and Uymaz, 2021;
Arnold, 2018).
Additionally, a characteristic that distinguishes
the banking sector from other sectors is the
breadth of its stakeholders, which includes the cen-
tral bank, customers (e.g. account owners, bor-
rowers, depositors), regulators, shareholders and
managers, all of whom have a direct stake in the
bank’s performance and risk (Branco and Ro-
drigues, 2008; Grifths, 2007; Yamak and Süer,
2005). Since banks provide necessary goods and
services, their business policies and strategies are
inextricably linked to public interest (Miles, 1987).
Globally, the banking sector is heavily regulated
because of its prominent public prole. However,
despite the stringent requirements and penalties
for banking nancial instability, the aggressive
lending decisions approved by bank managers are
blamed for precipitating the nancial crisis and
subsequent 2007−2009 global economic recession,
and for having a profoundly negative impact on
a wide range of stakeholders, the economy and
society at large. Indeed, the banking sector ful-
ls a critical function in the stability of the over-
all economic and nancial system (Boyd and De
Nicolo, 2005; Laeven and Levine, 2009). In our
3Many CSR studies exclude banks and nancial institu-
tions because of their less direct or visible impact on the
natural environment.However,Jeucken (2004) found that
the banking sector has high, direct social and environmen-
tal impacts because it has a substantial number of em-
ployees and, among other actions, uses a large amount
of ofce space and consumes abundant resources such as
paper,energy and water.
© 2022 The Authors.British Journal of Management published by John Wiley& Sons Ltd on behalf of British
Academy of Management.
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
Start Your Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting