Non-performing loans and bank performance: what role does corporate social responsibility play? A system GMM analysis for European banks

Abstract

PurposeThis research investigated whether corporate social responsibility (CSR) can alleviate the negative effect of non-performing loans (NPLs) on bank performance.Design/methodology/approachThe research employed a sample of European banks over the 2008–2017 period. To resolve endogeneity and heterogeneity problems, the system generalized method of moments (SGMM) model was employed.FindingsFirst, bank NPLs were negatively and significantly associated with bank performance as measured by the Q-Tobin ratio and the return on assets (ROA). Second, CSR scores exerted a negative and significant effect on the level of NPLs. Finally, the results indicated that bank performance could benefit from the interactional effect of CSR and NPLs.Research limitations/implicationsThis study fills the gap in the debate over the mediating role of CSR in the NPLs – bank performance interrelation. In addition, our SGMM analysis yielded more robust and efficient results while resolving endogeneity and heterogeneity problems concerning CSR and bank performance or risk in corporate finance.Practical implicationsCSR practices can play an essential mediating role in the NPLs–bank performance relationship. CSR activities in the European context may reduce the level of NPLs and increase bank performance.Originality/valueTo the best of the authors’ knowledge, studies of the implications of CSR activities on the banking sector are very limited. Indeed, this paper shows that CSR mediates the relationship between CSR practices and NPLs. The results suggest that bank performance could benefit from the interactional effect of CSR and NPLs.