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2023 | Buch

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New Challenges for the Banking Industry

Searching for Balance Between Corporate Governance, Sustainability and Innovation

herausgegeben von: Santiago Carbó-Valverde, Pedro J. Cuadros-Solas

Verlag: Springer Nature Switzerland

Buchreihe : Palgrave Macmillan Studies in Banking and Financial Institutions

Enthalten in: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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Über dieses Buch

This book aims to enrich the banking and finance literature by gathering insights in new research topics being undertaken in the aftermath of the Covid-19 pandemic. The book spans all the major research fields in finance and banking with a particular focus on corporate governance, sustainability and innovation.

The book brings together academics at a range of European universities and stems from research presented at the 2022 Annual Conference of the Wolpertinger Club. The first part focuses on the impact of banks’ corporate governance practice on their performance, including pay gaps as well as diversity and ESG policies. The second part examines how banks are conducting their green transition with topics including reputational risk, greenwashing, green bonds, and ESG scores. The final section of the book considers the role of digitalization and innovative technologies in creating unprecedented disruption in the banking sector.

This edited collection is valuable to those researching in finance, banking and business, as well as policymakers and operational decision makers at financial institutions.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract

The main objective of this book is to contribute to the banking and finance literature by providing insights into new research topics which are being undertaken in the aftermath of the COVID-19 pandemic. The studies included in the book mainly comprise empirical investigations and cover many major research fields in finance and banking. This book is structured in different chapters covering recent research studies on corporate governance, sustainability and green finance, and digitalization.

Santiago Carbó-Valverde, Pedro J. Cuadros-Solas

Corporate Governance

Frontmatter

Chapter 2. Compensation Policy in Banking: The Case of Tournament Incentives

Abstract

We consider the impact of tournament incentives on firm performance. To proxy high-powered tournament incentives, we construct a CEO pay gap as the difference in pay between the highest-earning executive and other officers. Our robust empirical evidence unambiguously demonstrates that high-powered tournament incentives lead to higher levels of firm profitability after controlling for the level of pay and other executive and firm-level characteristics. This result can inform the design of firms’ compensation policy and we recommend firms use vertical pay practices to motivate effort and realise firms’ organisational goals. We fail to support the opposing conjecture that large pay gaps could fuel tensions among executives that could retard firm performance.

Fatima Cardias Williams, Jonathan Williams

Chapter 3. The Effect of Board Diversity and ESG Engagement on Banks’ Profitability and Risk

Abstract

Companies, including banks, shall adapt to socio-economic risks and new trends like climate change. The mechanism to grasp stakeholders’ different social and environmental demands and include them in company’s strategies is to have a diverse board (i.e., board members with different gender, age and nationality). However, this diversity might create frictions and worsen decision-making. Therefore, this research investigates the impact of board diversity (BD) on bank performance (measured in terms of profitability and risk) assuming that BD shapes environmental, social and governance (ESG) engagement, which is also linked to performance. The analysis focuses on public commercial OECD banks from 2008 to 2019. Results on BD’s impact on bank performance are useful for policymakers, supervisory authorities, banks and managers in achieving more sustainable and stable banking.

Selena Aureli, Paola Brighi, Muddassar Malik, Hannu Schadewitz

Chapter 4. ESG Default Risk Mitigation Effect: A Time-Sectorial Analysis

Abstract

The integration of environmental, social, and governance (ESG) issues into risk-taking policies and firms’ strategic planning has become a topic of interest for banks, managers, researchers, and policymakers. We used a difference-in-difference econometric regression on a dataset of 1991 European listed companies to reply to the following research questions: (RQ1) Does each ESG pillar score impact the same magnitude firms’ probability of default on longer time horizons?; (RQ2) Does the ESG risk mitigation effect changes in the function of the sector firms belong to?. The first contribution confirms the existence of the risk mitigation effect, even for short-medium term probabilities of default. Additionally, we reveal that environmental score produces a remarkable impact on short-medium term default probabilities, while governance score improvements are consistent in the medium-long run. Conclusively, we quantify the sectorial impact on ESG risk mitigation effect for a subset of ten sectors.

Egidio Palmieri, Enrico Fioravante Geretto, Maurizio Polato

Chapter 5. Principles of the Optimal Government Regulation in the Financial Market

Abstract

Theoretical concept of regulation is based on the existence of market failures, which are defined by the deviation from the perfect competition model. In the chapter, the case of financial market with emphasis on the traditional banking market has been reviewed. In the article, authors have disclosed the review of literature of the principles of regulation. Literature review covers the period from 1998 till 2022, reviewing 185 sources, from which 30 sources were selected for analysis. In this review, we have identified 12 principles of the optimal government regulation, including recently highlighted topic of climate-related risks. 68% of sources refer to the following 5 principles: (a) Cost–benefit balanced, (b) Risk based, (c) Consistency and competitive neutrality, (d) High quality, transparent decision-making, and enforcement, and (e) International coordination, convergence, and implementation in policy and rulemaking.

Kristaps Freimanis, Maija Šenfelde

Sustainability and Green Finance

Frontmatter

Chapter 6. Firm Pollution and Reputational Risk: Where Do We Stand?

Abstract

This chapter considers the association between a firm’s pollution abatement behavior and reputational risk. We examine the contemporary literature on the interplay between a company’s environmental performance and financial performance, environmental performance and financing costs, and environmental performance and corporate governance characteristics. We discuss the interconnections between corporate ownership and environmental responsibility. We then analyze the links between reputational risk and polluting activities, focusing on the driving factors of corporate reputation risk and CSR. We provide an exploratory analysis of reputational risk, considering the experience of U.S. companies over 13 years before the COVID-19 pandemic. We use corporate chemical emission and reputational risk data from the United Toxic Release Inventory of the U.S. Environmental Protection Agency and the RepRisk database, respectively. Our exploratory results reveal a strong link between corporate pollution and the reputational risk of firms.

Alexia Ventouri, Georgios Chortareas, Fangyuan Kou

Chapter 7. Is All That Glitters That “Green”? An Empirical Investigation of the Magnitude of Greenwashing in Banking and Its Determinants

Abstract

This chapter examines banks’ “green finance” and greenwashing claims. Firstly, a new methodology is introduced to quantify the magnitude of greenwashing for a cross-country dataset in the period 2016–2020. Then, regression analysis is performed to test whether firms, country and temporal-level factors influence banks’ greenwashing practices. The results suggest that big, more profitable banks located in advanced economies are more likely to engage in greenwashing, and that this behavior has reduced over the selected time period. Considering that the adherence to voluntary disclosing initiatives does not significantly mitigate greenwashing, the research confirms the urgent need for stringent surveillance by a global governing body to check the reliability of banks’ sustainable data disclosed. It also points out that banks’ sustainable finance commitments and claims of “net-zero by 2050” cannot be taken seriously if they are considered as a license to avoid taking immediate action on their fossil fuel investments.

Gimede Gigante, Priscilla Greggio, Andrea Cerri

Chapter 8. Sovereign Green Bonds in Europe: Are They Effective in Supporting the Green Transition?

Abstract

This chapter focuses on sovereign green bonds issued in Europe. By issuing green bonds, European governments commit themselves to realizing environmental and sustainability goals through their investments. The topic is particularly important because when governments identify eligible assets and projects to include in a green bond programme, they signal their long-term commitment to environmentally friendly projects. By doing so, they can encourage other entities, including those in the private sector, to do the same. In addition, governments could pursue their green goals by issuing conventional bonds instead of specific “green” bonds, which begs the question as to why governments should address their activity towards specific green bonds. In order to study this question, a dataset of sovereign green bonds from the Bloomberg fixed income database is compiled. The data cover all European sovereign green bonds issued until the end of 2022.

Giuseppina Chesini

Chapter 9. The Impact of ESG Score and Controversy on Stock Performance

Abstract

Using an extensive international dataset based on Refinitiv environmental, social, corporate governance (ESG), and controversies scores, this chapter contributes investigating whether a high overall ESG score improves firm value and decreases risk and to what extent ESG controversies may negatively affect a firm’s financial performance. We find strong evidence of an improvement in value and risk associated with a better ESG score. Results are confirmed in the case of every single E, S, and G pillar. Findings also suggest that firms facing adverse ESG events experience a significant negative effect on value and risk. Our results are robust to different value and risk variables specifications and highlight that controversies affect more financial firms and emerging markets.

Paola Brighi, Antonio Carlo Francesco Della Bina, Valeria Venturelli

Innovation

Frontmatter

Chapter 10. The Digitalization of the European Banking Industry: Some Evidence

Abstract

The relevance of technology has increased for the banking industry. Improving banks’ technological skills is crucial to compete in a digital post-pandemic context. This chapter examines the digital transformation of the European banking industry by focusing on the annual banks’ expenses on information technology (IT). Using a representative sample of European banks from 2017 to 2021, we find that the ratio of IT expenses to total operating expenses and the ratio of IT expenses to total operating income have increased by 1.02 percentage points (+10.34%) and 0.95 percentage points (+15.82%), respectively. Moreover, becoming a high-IT bank is associated with some bank features. Less capitalized, riskier, more profitable, and less efficient and those banks that exhibit a lower growth of total assets spend more on IT. The chapter also reveals that banks are taking a step forward in critical IT areas such as artificial intelligence, blockchain, cloud computing, biometrics, and big data.

Santiago Carbó-Valverde, Pedro J. Cuadros-Solas, Cristina Gonnella, Francisco Rodríguez-Fernández

Chapter 11. The Relation Between Patent Pledgeability and Credit Rationing

Abstract

We analyze the economic issue raised when financial intermediaries refuse to supply credit to a borrower even at a higher rate than that posted by lenders. We suggest that patent-backed loans can be used as a contracting device to reduce credit rationing in loan markets characterized by imperfect information. Patents have become among the most valuable assets of firms in high-technology industries. They determine the production of goods and contain information about the firms’ credit quality. Patents can also be used by banks to screen borrowers. We provide a theoretical foundation showing that patents used as collateral may reduce the level of information asymmetry in loan markets and facilitate also bank lending. Using a setup of financial intermediation with capital constrained entities and imperfect information, we suggest that patent pledging can be used to minimize credit rationing. This may lead to more investment in innovation and more growth.

Aineas Mallios, Ted Lindblom, Stefan Sjögren

Chapter 12. Increasing the Predictive Power of Financial Distress models—The Case of the New Alert System Proposed by the Italian Nccaae

Abstract

This chapter develops and tests an alternative alert system to predict firms’ financial distress which combines the benefits of the Z-score’s multivariate discriminant model and the National Council of Chartered Accountants and Accounting Experts’ predictors. Using a sample of 43 viable and 43 non-viable Italian SMEs, the authors compare the predictive accuracy of the mentioned models over the period 2015–2019. Based on the results, they elaborate revised versions of both approaches, aligned to current socio-economic conditions. The authors also provide an alternative combined model. The analysis of the two baseline approaches showed complementary results, with the Z-score overperforming the alert system in predicting non-viable firms, whereas the opposite emerged on viable firms. The revised versions showed enhanced predictive accuracy. The authors’ contribution enriches the post-pandemic debate on financial distress prediction models by pointing out the limits of the NCCAAE alert system and suggesting an alternative and better performing model.

Federico Beltrame, Giulio Velliscig, Gianni Zorzi, Maurizio Polato

Backmatter

Titel: New Challenges for the Banking Industry
herausgegeben von: Santiago Carbó-Valverde
Pedro J. Cuadros-Solas
Verlag: Springer Nature Switzerland
Electronic ISBN: 978-3-031-32931-9
Print ISBN: 978-3-031-32930-2
DOI: https://doi.org/10.1007/978-3-031-32931-9