The effect of focus versus diversification On bank performance: does ethical structure matter?

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2021-12-27

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Çalı, Gizem

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Financial institutions pursue a tradeoff model in order to reduce risk and maximize profitability and performance. Ethical practices, like those of any other profit-maximizing firm, must pursue profit. For banks that target sustainable practices, what matters is how they generate profits and whether their practices have harmful social or environmental consequences. The aim of this thesis is to investigate the impact of asset and liability diversification on bank performance by taking into consideration the bank’s ethical status, which is measured by the bank’s sustainability rating ESG. Fixed Effect Models, Random Effects Models, and Prais-Winsten Regressions are used to test the relationship between diversification and bank performance. The findings of the study suggest that having an asset-focused portfolio impacts a bank’s profit performance and riskiness significantly. However, having a higher ESG score and an asset-focused portfolio decreases the impact of asset focus on return on assets and net interest margin. This finding implies that when a bank is rated higher on a compound sustainability measure, it has relatively lower profitability. On the other hand, liability focus has no significant impact on a bank’s profitability or riskiness. However, if a bank has a higher ESG score and a liability-focused portfolio then the impact of liability focus on net interest margin and credit risk is increasing. This finding, in return, implies that the level of diversification on the liability side matters mostly for higher-ESG banks.

Subject Keywords

Ethical banking, Focus vs diversification, ESG Score, Bank performance

URI

https://hdl.handle.net/11511/95221

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Graduate School of Applied Mathematics, Thesis

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Citation Formats

G. Çalı, “The effect of focus versus diversification On bank performance: does ethical structure matter?,” M.S. - Master of Science, Middle East Technical University, 2021.