Prague Economic Papers 2017, 26(3):330-344 | DOI: 10.18267/j.pep.609

The Effect of Ethics on Banks Financial Performance

Radek Halamka1, Petr Teplý2
1 Institute of Economic Studies, Faculty of Social Sciences, Charles University in Prague, Prague, Czech Republic (radek.halamka@gmail.com)
2 Department of Banking and Insurance, Faculty of Finance and Accounting, University of Economics in Prague, Prague, Czech Republic (petr.teply@vse.cz)

In this paper, we contribute to the literature focusing on ethics in banking from both theoretical and empirical point of view. We argue that the recent business of the global banking industry is not sustainable and we believe that ethical banking may represent one of the alternative models. In the empirical section, we investigate how ethics in the banking business models affects their financial performance. We identified 69 ethical banks and compared them with conventional banks using Bankscope data of more than 80,000 bank-year observations for the 2003-2013 period. We apply the Within-Between estimation method to bank financial indicators of Return on Assets, Return on Equity and their respective volatilities. We conclude that ethical banks report significantly lower volatility in Return on Equity than their conventional counterparts. In addition, the hypothesis that ethical banks would have higher profitability than their peers is not rejected.

Keywords: bank, ethics, financial performance, bank business models, profitability
JEL classification: A13, B12, B16, G21, Q56

Published: June 1, 2017  Show citation

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Halamka, R., & Teplý, P. (2017). The Effect of Ethics on Banks Financial Performance. Prague Economic Papers, 26(3), 330-344. doi: 10.18267/j.pep.609
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