Do social and environmental capabilities improve bank stability? Evidence from transition countries

ABSTRACT

Financial institutions have embraced the idea of corporate social responsibility (CSR) over the past decade, particularly in the banking sector, even as they have faced challenges in their core business model and an uncertain economic environment. Has the addition of CSR helped banks in their effort to become more stable via diversification, or has it squandered resources which could be utilised elsewhere? Using a sample of 319 commercial banks from 21 transition countries in Central and Eastern Europe and the former Soviet Union from 2002 to 2014, we find that there is a heterogeneous effect of CSR on bank stability, with total commitment to CSR contributing to the stability the most. Environmental capabilities, on the other hand, appear to influence stability only for those firms which are already the highest performing. We conjecture that, for financial sector firms in a transition environment, CSR is a further commitment for firms which have attained a certain level of stability but can be destabilising for weaker banks.

KEYWORDS:

• Environmental protection
• corporate social responsibility
• transition
• financial sector stability

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Similar data was utilised by Djalilov and Piesse (2019).

2. Once the point estimates of u_i,t (inefficiency) are obtained, estimates of technical (stability) efficiency are defined as Efficiency = exp(-u). A similar specification is used by Djalilov and Piesse (2019).

3. Please see Djalilov and Piesse (2019) for more details.

4. A few studies have suggested to control for the level of democracy in the estimation of environmental outcomes, whether it is deforestation or the ratification of international environmental agreements (Libman & Obydenkova, 2014b; Obydenkova et al., 2016; Obydenkova & Salahodjaev, 2017). While we are aware of the importance of democracy in environmental policies and implementation, we opt to control for the EU membership instead due to the nature of our analysis. Including both the EU membership and political freedom would result in multicollinearity of these two controls within post-Communist states. However, the importance of democracy for environmental outcomes should stay on the agenda and be addressed as the main focus within different studies.