Social capital, trust, and bank tail risk: The value of ESG rating and the effects of crisis shocks

Using a global sample of 244 banks in 52 stock markets, we investigate the effect of corporate social responsibility (CSR) on bank tail risk in normal and turbulent times. Our analysis shows no significant evidence that CSR intensity protects banks from tail risks ex ante or during the global financial crisis of 2007–2009. However, investors appear to become more tolerant and more lenient towards banks with stronger CSR post ante economic recession by reducing the likelihood of extreme devaluation of banking stocks. Socially responsible banks with higher social capital and trust (associated with superior CSR performance) experience lower idiosyncratic and systematic tail risks even in the context of the COVID-19 pandemic in 2020. Our empirical evidence implies that the trust between banks and investors started to build through banks' investments in social capital through committed CSR performance since the credit crunch erupted. © 2023 The Author(s)

Financial stability: a 'vaccine' for tail risk of the global banking sector in the shadow of the pandemic

This study examines the association between bank tail risk and the ongoing COVID-19 pandemic. We use a sample of 868 listed banks across 98 countries from 2002 to 2020, yielding a cross-country panel sample of 15,791 bank-year observations. We find that different components of bank tail risk (i.e. systematic and idiosyncratic) have increased during the health crisis but less so for stronger banks (i.e. more profitable, higher market valuation, lower stock volatility). The result implies that the pandemic results in a higher possibility of suffering extremely large losses in the stock prices of the global banking sector. However, banks with higher profitability and financial stability levels can better prepare themselves to tackle the crisis more effectively and hence are less likely to suffer extreme equity devaluations. Therefore, we contend that financial stability acts as a 'vaccine' for the bank tail risk in the shadow of the pandemic. We finally confine the results to some specific geographic settings;typically, they are more intensified in countries with more financial freedom, middle income-generating, and large banks.