Does ESG Predict Systemic Banking Crises? A Computational Economics Model of Early Warning Systems with Interpretable Multi-Variable LSTM based on Mixture Attention

Abstract

Systemic banking crises can be very damaging to economic development, and environmental, social, and governance (ESG) can also damage national finances, but there is no research on whether ESG affects systemic banking crises, and we fill this gap. We first employ Fisher scores (FS) to select features and then use an interpretable multivariate long-short-term memory (IMV-LSTM) model with focal loss (FL) to account for class imbalance to model an early warning system (EWS) that can predict up to one year in advance. This study finds that ESG influences the occurrence of systemic banking crises, with our early warning system predicting each crisis a year in advance.