Stock Repurchases, ESG-Ratings, and Systemic Risk in Banking

Thomas Gehrig

No 19188, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Stock repurchases of banks have become an increasingly popular instrument of banks’ payout policies after the Great Financial Crisis. Recent empirical evidence documents that stock repurchases are particularly popular among global systemically important banks that tolerate relatively high levels of exposure to systemic risk. Hence, stock repurchases add to reducing risk-bearing capital precisely for those banks that have the greatest capital shortfall. The allow to secure short-term gains at the cost of long-run stability. This thematic review of the empirical literature finds that various ESG-ratings are indeed informative about the true underlying intentions and planning horizons of bank business models. ESG-ratings are informative both, about idiosyncratic as well as systemic risk, and, hence, implicitly also about bank resiliency. While regulators generally are not in the business to save individual firms, in the banking industry, however, their mission is to maintain the stability of the financial sector as a whole. This implies to ensure that systemic risk remains within socially acceptable bounds. Especially the exposure to systemic risk as proxied by capital shortfall requires a sufficiently high level of bank capital. Accordingly, one strong recommendation emerges from this survey of the relevant empirical literature: Since ESG-scores are particularly informative about the planning horizon of the underlying firms or banks, permission to repurchase stock should be granted particularly to those banks with higher ESG scores. Granting permission also to banks with lower ESG-scores increases bail-out risk for the tax payer, as experienced recently in the case of Credit Suisse.

Date: 2024-06
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