Working Paper: CEPR ID: DP17744
Authors: Thomas Gehrig; Maria Chiara Iannino; Stephan Unger
Abstract: The relative importance of banks for the financial system differs widely in Europe and the U.S., where Europe has historically been more bank-based than U.S. How does the different role of the banking systems translate into the resiliency of bank business models, and of the financial system overall? In aggregate, European banks are more exposed to systemic risk relative to U.S. banks despite the fact that their book-based tier-1 core capital is comparable. However, there is wide heterogeneity across European banks rendering the transatlantic comparison more delicate. Also, we find differences in social responsibility scoring between the two systems. ESG scores tend to be higher for European banks, particularly on the Social and the Environment components. On the other side, US banks score higher on Governance items. Upon inspection of the subcategories of each ESG pillar, it appears that on average European banks tend to maintain a longer planning horizon. Nevertheless, the largest European banks employ internal credit risk models which enables them to reduce capitalization and increase capital shortfall. Effectively, at the start of the pandemic in March 2020 the largest European banks are more highly levered relative to their U.S. peers, and, consequently lagging behind in terms of market capitalization.
Keywords: ESG scores; bank resiliency; systemic risk; financial stability; sustainable banking
JEL Codes: G12; G21; G24; M14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| European banks are more exposed to systemic risk than US banks due to regulatory differences and roles in financing government debt (F65) | systemic risk (E44) |
| Higher ESG scores (Q56) | systemic risk (E44) |
| Governance scores (H11) | contribution risk (D64) |
| Higher capital shortfalls are influenced by regulatory policies and roles in financing government debt (G28) | capital shortfalls (G32) |
| Delta covar (C46) | contagion risk (F65) |