Drivers of Global Banking Stability in Times of Crisis: The Role of Corporate Social Responsibility

Abstract

This study examines the effect of environmental and social (ES) activities on global banking stability in the shadow of the COVID-19 pandemic. Using a sample of 244 commercial 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 financially stable (i.e. lower credit and liquidity risk exposures). Drawing on social capital and stakeholder theories, we find that ES activities increase firm-level social capital and establish a stakeholder-centred culture within a bank, strengthening social trust and public confidence in the bank's risk oversight. Accordingly, ES activities constrain excessive and aggressive bank risk-taking during turbulent times when short-termism prevails. Our additional analysis reveals that investors value such beneficial effects of ES activities. The findings offer new insights into the increasingly significant roles of social capital creation and stakeholder-centred culture in maintaining banks’ financial stability.