Politická ekonomie
Politická ekonomie
Prague Economic Papers
University of Economics, Prague

Prague Economic Papers Vol. 26 No. 3

The Effect of Ethics on Banks’ Financial Performance

DOI: https://doi.org/10.18267/j.pep.609

[full text (PDF)]

Radek Halamka, Petr Teplý

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, bank business models, ethics, financial performance, profitability

JEL Classification: A13, B12, B16, G21, Q56

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