Financial stability: does social activism matter?

Abstract

Purpose

This study investigate the impact of social activism on financial system stability.

Design/methodology/approach

Financial stability was analysed from two complementary perspectives: bank-led financial stability and financial system stability driven by sector-wide credit supply. Social activism was analysed from three perspectives: gender equality advocacy, environmental sustainability advocacy and social protection advocacy.

Findings

The findings reveal that gender equality and environmental sustainability advocacy have significant positive effects for financial stability, whereas social protection advocacy has a significant negative effect for financial stability. In addition, social activism has negative effects for financial stability in the post-2008 financial crisis era. Finally, there are differential effects for country-groups, for instance, social activism strongly improves bank-led financial stability in African countries and for BLEND countries (countries that are eligible for International Development Association (IDA) borrowing based on per capita income levels and are also creditworthy for some borrowing from the International Bank of Restructuring and Development). The findings are relevant for the on-going debate about whether social inclusivity and activism has any economic value for the stability of businesses and the financial system. The findings have implications.

Research limitations/implications

The implication for policy-making is that the pressure on, or commitment of, financial institutions to be socially inclusive in all social matters such as gender equality, environmental sustainability and social protection does not guarantee stability in the financial system – whether bank-led financial stability or sector-wide financial stability. Therefore, regulators should ensure that financial institutions exercise careful discretion when adjusting their risk models to include all “social risk” factors amidst the recent pressure on corporations to be socially inclusive.

Practical implications

Another implication for business practice is that business leaders in financial institutions should identify the optimal level of social inclusivity that improves the stability of their corporations, because it would seem counterproductive if business leaders adopt full-scale social inclusion (or considerations) that subsequently make their corporations financially unstable which could lead to loss of shareholders wealth.

Originality/value

This study is the first attempt to investigate the impact of social activism on financial stability to determine whether greater social activism promotes stability or instability in the financial system.

Citation

Ozili, P.K. (2020), "Financial stability: does social activism matter?", Journal of Financial Regulation and Compliance, Vol. 28 No. 2, pp. 183-214. https://doi.org/10.1108/JFRC-08-2018-0118