Modelling sustainability efficiency in banking

Abstract

We significantly contribute to the empirical literature by investigating sustainability efficiency in the banking industry and decompose it into internal sustainability and external sustainability in an explicit manner. We fill in the gap of the literature by considering internal sustainability from two perspectives which are banking stability and economic performance. We also extend the current studies by including both banks' social contributions (contributions to the society and the company development) and environmental responsibility to the estimation of external sustainability. Finally, we fill in the gap of the literature by estimating the determinants of bank sustainability efficiency. The findings from the output distance function and the panel vector autoregressive model show that the sustainability efficiency level in the Chinese banking industry (2007–2017) ranges from 0.45 to 0.75 (maximum sustainability efficiency score is 1 and minimum sustainability efficiency score is 0). There is a larger difference in terms of external sustainability efficiency in the sample, while stability is still one of the most serious issues, as reflected by the low stability efficiency score compared to other efficiency concepts. The results also show that internal sustainability efficiency is significantly affected by the firm specific determinants, business environment determinants and economic environment determinants.