Bank’s capital structure and risk allocation after the introduction of ESG criteria in the financial sector

The thesis brings together three papers related to risk management in credit institutions. Each of them deals with aspects of risk management in banks arising from supervisory innovations introduced by the regulator. In recent years, regulatory innovations have been numerous and have profoundly influenced the banking sector. In this thesis we initially deal with the introduction of Total Loss Absorbing Capacity (TLAC) requirements for Global Systemic Important Banks (G-SIBs). This capital requirement has been introduced in order to reduce the existence of contagion effects within the banking and financial system. Moreover, the introduction of the loan origination and monitoring guidelines (LOM) by the European Banking Authority (EBA) highlighted the importance of ESG topics within the credit granting process. This process of integrating ESG issues into banks' risk management can have effects: (i) indirect, when ESG performance impacts companies in banks' loan portfolios; (ii) direct, when improvements in ESG scores have direct effects on banks' riskiness and profitability. Therefore, the second article is structured to analyze the implications in terms of risk mitigation following indirect improvements in ESG scores. The third paper, on the other hand, analyses the direct risk mitigation effects on financial institutions. More specifically, the first paper explores the impact on G-SIBS’ capital requirements following the introduction of TLAC by the Financial Stability Board (FSB) in 2015. We have divided the effects into microeconomic and macroeconomic impacts. The former is related to individual banks, while the latter consider the entire financial system as a whole. Through a market analysis, we have highlighted the need for G-SIBs to strengthen their capital endowment, mediating the use of instruments such as senior non-preferred bonds (SNPB). The higher cost of raising funds could lead to an increase in the price of loans and a credit contraction. The second paper is empirical in nature and tries to answer the following two research questions (i) RQ1: To what extent do ESG individual pillars contribute to reducing firms' default probabilities?; (ii) RQ2: How ESG risk mitigation effect is amplified d or reduced by the sector firms belong to? Using a sample of 335 European listed companies, we have quantified and demonstrated the existence of an indirect risk mitigation effect on listed companies. In addition, we have provided evidence of how much and to what extent the sector contributes to the risk mitigation effect mentioned above. The third paper deals with the direct effects of ESG performance on the risk and return profile of credit institutions. In addition to what has already been observed in the literature, the new element is the use of cluster analysis to define a set of dummies expression of the banks' business model. We have proved empirically that the investing activities, retail, and wholesale business models are able to present a direct ESG risk mitigation effect with a confidence level of 99%. Finally, regarding profitability, we observe that governance performance produces value for banks' stakeholders, while the other pillars significantly affect stockholders.