Macro-Prudential Implications of Sustainability Policies in the Banking Sector

Abstract

Sustainability related issues, such as inequality, water security, and climate risk, represent a significant concern for many individuals and organizations, threatening the stability of the world's markets, including the financial markets. Meanwhile, the financial sector developed strategies and products to improve social and environmental prosperity. Also, financial regulators created incentives to promote sustainable practices. However, the effect of sustainable practices and regulations on the banks' financial stability is unclear. Literature evidences a research gap in studies linking financial stability and sustainable finance practices and regulations. Additionally, the main theories that cover financial stability overlook the systemic risk that originated from climate and social sources. The main objective of this thesis is to analyze the influence of sustainable finance regulations over the financial stability of Latin America from 2008 to 2017. This research study uses the data from 149 banks in 17 countries in Latin America form 2008 to 2018. The Zscore is used to measure the levels of financial stability of the banks studied. These banks are divided into two groups depending on the existence of sustainable banking regulations in the countries they operate. Several quantitative methods are applied, including a two-mean difference Welch t-test, a panel binary logit regression, a random-effects regression, and a dynamic panel data regression using a two-step GMM model. Comparing banks operating in countries with and without sustainable banking regulations shows significant results. Banks located in countries that have sustainable finance regulations present higher financial stability levels. This study concludes that sustainable finance regulations promote financial stability as well as sustainable banking practices. Further research is needed to understand the transition towards sustainable banking and impacts on systemic risk.