Green banks vs. non-green banks: A Differences-in-Differences CAMEL-based approach

Abstract

The need for the transition from a high-carbon to a low-carbon economy has led to the creation of the so-called green banks, while many financial institutions around the world are gradually adjusting their loan portfolio to a greener one by financing environment-friendly projects. Using a panel data set of 165 global and non-global banks from 38 countries worldwide, covering the period 1999 – 2015, we examine whether there are any discernible performance differences between green and non-green banks. The variables of interest are fundamental CAMEL factors. By employing panel data techniques, we investigate whether there are statistically significant differences between the two groups. Moreover, we adopt the Differences-in-Differences approach to examine whether green banks (“treatment” group) and non-green banks (“control” group) exhibit differential behavior, and we use the financial crisis outbreak as the time of intervention. We find that both green and non-green banks are affected by nearly the same bank-specific factors and that they do not exhibit heterogeneous behavior with respect to several fundamental aspects. Specifically, our results show that green banks – whether global or not – perform better than their non-green counterparts only in terms of Total Capital Ratio and Tier1 Capital Ratio during and after the financial crisis. As for the rest of the CAMEL factors, it seems that both groups exhibit the same behavior, especially in the post-crisis period. In addition, our results indicate that the financial crisis has: (a) a positive effect on capital adequacy (excluding Leverage Ratio which seems to have remained unaffected), on asset quality and management quality; (b) a negative effect on earnings ability; (c) a negative impact on liquidity, for both bank types. These results seem robust for the pre- and, especially, the post- 2007-2008 financial crisis periods.

Keywords: CAMEL factors, financial crisis, Green banks, Non-green banks.

JEL Classification: C33, G01, G21, G29.