Impact of social progress on bank stability

Abstract

This paper examines how social progress and its dimensions, i.e., basic human needs, foundations of well-being, and opportunity, play a significant role in shaping the financial stability of banking systems. It empirically assesses the viability of three bank-level transmission channels: efficiency, diversification and competition, through which social progress propagates its effects on bank stability. Using bank-level data for 815 commercial banks from 49 countries during the 2011-2019 period, the results show that heightened social progress positively affects bank stability. Furthermore, the impact of social progress on bank stability can be realised through efficiency and diversification as conduits, with little evidence being found for the competition conduit. Findings support that policy should consider social progress-based prescriptions beyond traditional GDP growth models to bolster bank stability.