Assessment of the causal interplay between the social profile of European countries and main banking sector indicators

Abstract

Social indicators represent a component of the broader Environmental, Social, and Governance (ESG) framework that is regularly evaluated and monitored at global and European level, in order to identify key social trends and country-specific social challenges which may further impact the real economy or the financial system development. The paper investigates the interplay between the social dimension of a country and several key banking indicators of profitability, capital adequacy, efficiency, credit quality, and savings ratio, as well as bank concentration. The causal relationship between the social and banking indicators is assessed by means of the Granger test, in a granular approach for each European country in the sample. A general result indicates that changes in the level of social indicators precede changes in banking indicators in France and Greece, while in Belgium, Italy, Netherlands, Spain, and Portugal the interplay is relatively balanced between social and banking indicators. The findings show that the predominant social feature that appears most in the statistical relationship with the banking indicators, regardless of the country considered, is the ageing of the population (population ages 65 and above). Bidirectional causality is mainly identified between the population ageing and banking indicators that proxy for the savings rate, credit expansion, solvency, and bank efficiency. From a unidirectional perspective (social characteristics represent the cause and banking indicators are the effect) findings show that people's age and government expenses with education have the ability to influence more of the key banking indicators considered.