Credit Markets with Ethical Banks and Motivated Borrowers

Abstract

This paper investigates banks' corporate social responsibility. The credit market is composed of two sectors: one for standard and one for ethical projects. Since ethical banks are committed to investing in ethical projects, standard and ethical banks compete in the market for ethical projects. The latter have also a social profitability, but a lower expected revenue with respect to standard ones. If their expected revenue is not too low, ethical projects are undertaken by motivated borrowers. The latter obtain a benefit (a social responsibility premium) from accomplishing ethical projects in general and a premium for successful interaction when trading with ethical banks in the case the project is successful.If the expected profitability of ethical projects is sufficiently close to that of standard ones and/or the premium for successful interaction of motivated borrowers is sufficiently high, ethical banks are active, both sectors of the credit market exist and the whole market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure.Jel classification: D86, G21, G30.

Doing Good or Avoiding Evil? An Explorative Study of Depositors’ Reasons for Choosing Social Banks in the Pre and Post Crisis Eras

“…The present results add multiple important reasons, such as "Shared Values" or "Rejection, disappointment and mistrust towards conventional banks and the financial system". While previous studies have expected social banks' placement of assets to be one of the main reasons for choosing social banks [7][8][9][10]22], the present results specify this general assumption by identifying at least seven dimensions (categories) of this reason, allowing for a much more specific investigation of customer preferences. Five reasons were identified as being of more potential relevance to depositor decision-making.…”

“…One reason for this lack of evidence might be the remaining uncertainty about depositors' reasons for choosing social banks in general. Previous research has assumed that private customers hold deposits with social banks to give their money real meaning, to receive an extra stream of utility, and to reinforce their pro-social identity by financing social business projects [7][8][9]. However, Höhnke and Homölle [10] show that social banks' placement of assets alone cannot explain depositors' choice of social banks and argue that other reasons for choosing social banks must exist.…”

Impact investments, evil investments, and something in between: Comparing social banks' investment criteria and strategies with depositors' investment preferences

“…Since all four differences between social and conventional banks predominantly refer to social banks' investment selection, it is reasonable to expect that the investment selection is a key reason for depositors’ choice of social banks. Previous research has argued that private customers hold deposits with social banks to give their money real meaning, to receive an extra stream of utility, and to reinforce their pro‐social identity by financing pro‐social business projects (Barigozzi & Tedeschi, 2015; Cornée & Szafarz, 2014; Paulet et al., 2015). Depositors are even willing to receive lower interest rates on savings because their deposits are used to fund pro‐social businesses (Cowton, 2002; Cowton & Thompson, 2001; Cornée & Szafarz, 2014).…”

“…Previous studies have assumed that private customers hold deposits with social banks to give their money real meaning, to receive an extra stream of utility, and to reinforce their pro-social identity by financing pro-social business projects (Barigozzi & Tedeschi, 2015;Cornée & Szafarz, 2014;Paulet et al, 2015), implying that people hold deposits with social banks due to social banks' special placement of assets. San-Jose et al (2011) showed that social banks indeed differ from conventional banks in their placement of assets, meaning that social banks' investment selection creates additional value by financing pro-social or pro-environmental businesses.…”

“…Previous studies have assumed that private customers hold deposits with social banks to give their money real meaning, to receive an extra stream of utility, and to reinforce their pro‐social identity by financing pro‐social business projects (Barigozzi & Tedeschi, 2015; Cornée & Szafarz, 2014; Paulet et al., 2015), implying that people hold deposits with social banks due to social banks' special placement of assets. San‐Jose et al.…”