1
Journal of Economic and Banking Studies
No.8, Vol.4 (2), December 2024 pp.01-16
©
Banking Academy of Vietnam
ISSN 2734 - 9853
Green bank regulation and global bank complexity:
An international study
Tran, Quang Phu1 - Doan, Ngoc Thang2*
Ho Chi Minh National Academy of Politics1, Banking Academy of Vietnam2
*Corresponding Author.
E-mail address: tranquangphu@hcma.edu.vn (Tran, Q. P.), ngocthangdoan@hvnh.edu.vn (Doan, N. T.)*
Chronicle Abstract
Article history This study investigates the relationship between green bank regulation and
global bank geographic complexity using data from 121 countries spanning
the period 1996 to 2021. By examining the affiliate networks of internation-
ally active banking organizations, we construct a comprehensive measure
of bank geographic complexity for each country. Green bank regulation is
defined based on whether central banks have an explicit sustainability man-
date (Dejure) or actively support government policies aimed at achieving
sustainability goals (Defacto). The findings reveal that green bank regula-
tion has a positive and significant impact on bank geographic complexity,
with stronger effects observed in Low-Income and Lower-Middle-Income
Countries (LI & LMC) and Upper-Middle-Income Countries (UMC). Exten-
sive robustness checks confirm the stability of these results across alterna-
tive measures. The study underscores the importance of targeted green
regulatory frameworks and highlights their role in fostering a more diverse
and globally integrated banking sector. These findings offer valuable policy
and managerial implications for promoting sustainability and complexity
within the financial sector.
Received
Revised
Accepted
30th Oct 2024
06th Dec 2024
10th Dec 2024
Keywords
Bank geographic com-
plexity,
Green bank regulation,
International study
DOI:
10.59276/JEBS.2024.12.2694
1. Introduction
As the global financial sector grapples
with the dual challenges of achiev-
ing environmental sustainability and
maintaining financial stability, the role of green
bank regulation has gained increasing promi-
nence. Central banks and regulatory authorities
worldwide are urged to integrate sustainability
goals into their mandates, fostering economic
resilience and contributing to global climate
change efforts (McKibbin et al., 2017; Dikau
& Volz, 2021). Green bank regulations encom-
pass various policies and practices aimed at
promoting environmental sustainability within
financial systems. These regulations can be
classified into formal mandates, referred to as
Dejure regulations, which establish explicit
policies and standards, and more market-
driven, adaptive measures, known as Defacto
regulations (Dafe & Volz, 2015; Aldasoro
et al., 2021; Zheng et al., 2024). Despite the
growing recognition of the importance of these
policies, their implications for the global bank-
ing sector’s geographic complexity remain
underexplored.
Banking geographic complexity refers to the
extent and structure of banks’ cross-border
operations, including their affiliate networks
and international expansion. This complexity
reflects a bank’s capacity to diversify risks,
access global capital markets, and navigate
Green bank regulation and global bank complexity: An international study
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Journal of Economic and Banking Studies- No.8, Vol.4 (2), December 2024
regulatory environments across different
jurisdictions (Cetorelli & Goldberg, 2014). As
sustainability-focused regulations gain traction,
key questions emerge: How do green bank
regulations influence global banking complex-
ity? Do these regulations facilitate or constrain
banks’ international expansion, especially in
regions with varying levels of financial de-
velopment? These questions are essential for
policymakers and banking institutions aiming
to balance sustainability and growth objectives
effectively.
This study seeks to answer these research ques-
tions by examining the impact of green bank
regulations on global bank geographic com-
plexity using a dataset from S&P IQ Capital
Pro. Covering 121 countries from 1996 to
2021, this dataset provides detailed ownership
information on active banking entities, facilitat-
ing an exploration of the link between green
regulations and bank complexity while con-
trolling for country- and time-specific effects.
The study employs a BGC index based on the
Herfindahl-Hirschman Index (HHI) methodol-
ogy to measure bank geographic complexity,
emphasizing its distinctiveness from business
model complexity (Pham & Doan, 2023).
Moreover, green bank regulations are defined
through Dejure measures, reflecting formal
policy mandates, and Defacto measures, captur-
ing practical, market-driven applications (Dikau
& Volz, 2021). By examining these two dimen-
sions across income-level groups, the study
offers a nuanced understanding of how green
regulations shape the international strategies of
banks and drive global banking complexity.
This research contributes to the existing
literature in several significant ways. First, it
provides a novel examination of green bank
regulation by distinguishing between Dejure
and Defacto measures, offering a comprehen-
sive view of how formal policies and practical
applications influence global bank complexity.
Second, the study introduces a unique measure
of bank geographic complexity by analyzing
the affiliate networks of internationally active
banking organizations. This approach captures
the structural and operational aspects of banks’
cross-border activities, thereby offering a more
nuanced understanding of complexity. Third,
by incorporating data from 121 countries and
spanning a substantial time period (1996 to
2021), the study provides robust evidence on
how green regulations impact banks differently
based on regional economic development and
financial maturity.
The remainder of this paper is structured as fol-
lows: Section 2 reviews the relevant literature
and develops a hypothesis. Section 3 details
the data, variables, and empirical methodol-
ogy employed. Section 4 presents the baseline
results and further analysis across income-level
groups. Finally, Section 5 offers the conclu-
sion, policy implications, and suggestions for
future research.
2. Theoretical backgrounds and hypothesis
development
2.1. Green bank regulation
The concept of green bank regulation involves
integrating environmental considerations into
the financial regulatory framework to promote
ecological sustainability alongside financial
stability. This approach is increasingly being
adopted by central banks and financial institu-
tions worldwide to address the systemic risks
posed by climate change (Gupta et al., 2023). A
theoretical model suggests incorporating envi-
ronmental, social, and governance (ESG) fac-
tors into bank capital regulations, introducing
a green K-index to penalize non-compliance
with ecological standards, thereby encouraging
banks to favor green over brown investments
(Cho et al., 2021).Empirical evidence from
Bangladesh indicates that regulatory interven-
tions in green banking can enhance financial
performance, primarily through cost efficiency,
although political connections may mitigate
these benefits (Bose et al., 2021). In China, the
Green Credit Policy mandates banks to con-
sider corporate environmental performance in
loan decisions, effectively reducing pollution
by incentivizing firms to adopt preventive mea-
sures (Sun et al., 2019). However, the policy’s
Tran, Quang Phu - Doan, Ngoc Thang
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No.8, Vol.4 (2), December 2024 - Journal of Economic and Banking Studies
impact on credit risk varies, reducing it for
major state-controlled banks while increasing
it for smaller regional banks due to information
asymmetries (Zhou et al., 2022). Green banking
practices, such as those in Pakistan, emphasize
policy-making and investment in green proj-
ects, significantly influencing environmental
performance (Rehman et al., 2021). Addition-
ally, a sustainable loan loss provisioning system
has been proposed to align bank provisions
with environmental impacts, encouraging
loans to eco-friendly businesses (Ozili, 2023).
Despite these advancements, challenges such
as greenwashing, where institutions falsely
claim environmental benefits, necessitate robust
regulatory measures, including rewards, penal-
ties, and certifications to ensure genuine green
finance practices (Liu et al., 2024).
2.2. Global bank complexity
Recent literature has increasingly focused on
bank complexity and the geographic expan-
sion of banks. Several studies highlight the
significant rise in geographic complexity over
the past few decades and explore its implica-
tions (Cetorelli & Goldberg, 2014; Carmassi &
Herring, 2016). From one perspective, Coase
(1937)’s theory of the firm argues that deci-
sions within hierarchical organizations are
driven by power dynamics rather than market
prices. Lamont and Polk (2002) provided
evidence that resource allocation in diversified
firms differs from that in non-diversified firms
within the same industry. Scharfstein and Stein
(2000) suggested that resource misallocation
leads to diversification discounts in diversified
firms compared to a portfolio of specialized
firms. Theories explaining these diversifica-
tion discounts include agency theories (Rajan
et al., 2000) and influence cost models (Meyer
et al., 1992). However, Markides and William-
son (1994) argued that diversification can be
advantageous by enabling firms to efficiently
allocate internally generated funds in the pres-
ence of frictions in external capital markets.
In the financial sector, research on economies
of scope in financial conglomerates is expand-
ing. Houston et al. (1997) found that bank
holding companies effectively allocate funds
to subsidiaries facing more favorable lending
opportunities. Conversely, Laeven and Levine
(2009) identified a diversification discount
in financial conglomerates, indicating that
complex banking organizations tend to shift
from traditional financial intermediation to
fee-based activities. While complexity and
economies of scope are interrelated within an
organizational framework, the complexity of
banking organizations can create externality
distortions, including the well-known moral
hazard problem associated with “too-complex-
to-resolve” situations.
To better understand the impact of complex
banking organizations on the financial system,
scholars aim to define their characteristics and
evolution (Cetorelli et al., 2014) and to develop
metrics for measuring global bank complexity
(Cetorelli & Goldberg, 2014). Cetorelli and
Goldberg (2014) proposed “organizational
complexity” metrics that capture the structure
of a bank through its various affiliated entities.
This metric includes the notion of geographic
complexity, which reflects the distribution of
a bank’s affiliates across different regions or
countries.
2.3. Effect of green bank regulation on global
geographic complexity
The effect of green bank regulation on global
geographic complexity involves a multifaceted
interplay of positive and negative dimensions.
Green finance, which includes regulatory
frameworks aimed at promoting environmental
sustainability within the financial system, has
shown the potential to enhance the complexity
and sophistication of export technologies. This
is particularly evident in regions with robust
financial systems and institutional support, as
these conditions enable financial resources to
be effectively directed toward innovation in
green technologies (Liu et al., 2023; Zhang &
Liu, 2023). This development is significant,
as increased technological complexity often
correlates with a competitive edge in the global
Green bank regulation and global bank complexity: An international study
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Journal of Economic and Banking Studies- No.8, Vol.4 (2), December 2024
market, driving further economic growth.
However, geographic factors play a critical role
in shaping the uneven impacts of green finance
across different regions. The distribution of
financial resources and the allocation of green
credit vary significantly, leading to dispari-
ties in technological innovation and economic
development. Regions with well-established
financial systems are better positioned to chan-
nel green finance effectively, whereas regions
with weaker institutional support may struggle
to keep up, creating regional imbalances
(Zheng et al., 2024). For example, while green
credit policies can promote local innovation in
sustainable technologies, they can also lead to
unintended consequences, such as the reloca-
tion of polluting industries to less-regulated
areas or the migration of R&D personnel to
regions with greater financial support. These
effects are particularly pronounced in central
and western regions, where financial and regu-
latory capacities may be less developed (Zheng
et al., 2024).
Moreover, the concept of geographic com-
plexity in banks is closely linked to their
international affiliate networks. On the one
hand, these networks allow banks to diver-
sify risks and absorb local economic shocks
more effectively. By spreading their opera-
tions across multiple regions, banks can access
new markets and leverage different regulatory
environments to enhance their financial stabil-
ity. On the other hand, geographic complexity
also creates opportunities for banks to exploit
regulatory loopholes or circumvent stricter
domestic regulations, thereby increasing the
overall risk within the financial system (Al-
dasoro et al., 2021). This duality underscores
the challenges in managing the regulatory and
systemic risks associated with complex bank-
ing structures.
Geographic proximity also plays a crucial role
in facilitating green innovation. Firms located
strategically between financial hubs are better
positioned to tap into financial resources for
green initiatives, benefiting from both proximi-
ties to capital and the clustering of expertise
and innovation. However, stringent external
environmental regulations may diminish this
advantage, imposing additional costs or com-
pliance burdens that could offset the benefits
of proximity (Sheng & Ding, 2024). This
complexity highlights the nuanced relation-
ship between geographic location, regulatory
frameworks, and financial innovation.
Additionally, the development of green finance
and the intensity of environmental regulations
have been shown to significantly impact re-
gional environmental sustainability. However,
these impacts are not uniformly distributed
across regions, with variations in regulatory
implementation leading to spatial spillover
effects. Regions with stronger environmental
regulations and financial frameworks tend to
experience more pronounced benefits, such as
improvements in air quality and reductions in
industrial pollution, while regions with weaker
frameworks may lag behind (Deng & Zhang,
2023). This uneven distribution points to the
need for coordinated policy efforts that en-
sure equitable access to the benefits of green
finance across different geographic areas.
In conclusion, the interaction between green
bank regulation and global geographic com-
plexity underscores the importance of cohesive
policy efforts aimed at balancing regional
development and environmental sustainability.
Policymakers must work to ensure that the
advantages of green finance are not only maxi-
mized but also fairly distributed, minimizing
negative externalities and fostering inclusive
growth. This leads to the following hypothesis:
H1: Green bank regulation drives up global
bank complexity.
3. Data and methodology
3.1. Data
To evaluate the effect of green bank regula-
tion on global bank complexity, it is necessary
to quantify both variables. We constructed a
specialized dataset capturing the complexity of
internationally active banks, using information
from the S&P IQ Capital Pro database. This
dataset includes ownership details of banking
Tran, Quang Phu - Doan, Ngoc Thang
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No.8, Vol.4 (2), December 2024 - Journal of Economic and Banking Studies
entities operating across 121 countries, which
were active for at least one year between 1996
and 2021 and submitted financial statements
to S&P Global. For each bank and year, the
dataset provides information on the reporting
country and the country of ownership origin,
among other details. A bank is considered
foreign-owned if 50% or more of its shares
are held by foreign shareholders. The country
where the largest foreign shareholder is based
is designated as the “parent bank” country.
Given the dataset’s limitations, we follow the
methodology of Pham and Doan (2023) to
construct a measure of bank complexity, based
on the framework developed by Cetorelli and
Goldberg (2014). Since the banks in our datas-
et are internationally active, this method allows
us to focus on the global nature of their opera-
tions. To quantify global bank complexity, we
employ a geographic Herfindahl-Hirschman
index (HHI) as a proxy, which aligns with the
approaches used by Cetorelli and Goldberg
(2014) and Aldasoro et al. (2021).
BGCi = Ri/(Ri-1) (1-∑{j=1}^{Ri}(FBankij/To-
talFBanki)2) (1)
where FBankij is the number of foreign banks
in country i own by residents in country j. Ri is
the total number of source countries that own
banks in country i. TotalFBanki is the total
number of banks in country i that are owned
by non-residents. A higher value in this index
implies higher complexity. If all foreign banks
are owned by non-residents of a single country,
this index takes the lowest value, 0. If each
bank has different non-resident ownership, this
index will record 1, the highest value. Hence,
the information reflected by this metric is dif-
ferent from – and complementary to – informa-
tion obtained from measures based on plain
counts of foreign banks or source countries.
As this index takes into account the concentra-
tion of foreign ownership in each country, it
has the advantage that it represents geographic
complexity distinctly from the scale of banks’
organizational structure.
Data on green banking regulation is sourced
from Dikau and Volz (2021), who utilized
information from the IMF’s Central Bank Leg-
islation Database and reviewed central banks’
websites to identify sustainability-related poli-
cies that have been practically implemented.
Based on their analysis, we categorize green
central banking regulation into two types:
Dejure and Defacto. Dejure regulation indi-
cates whether a central bank explicitly includes
sustainability objectives or supports govern-
ment policies aimed at achieving sustainability
goals. In contrast, Defacto regulation reflects
whether a central bank actively engages in
green activities.
For Dejure regulation, we created a vari-
able called Dejure that takes a value of 1 if a
country has explicit or implicit sustainability
objectives, and 0 if it does not. Defacto regu-
lation captures the central bank’s real-world
activities aimed at addressing climate risks and
sustainability challenges. These activities focus
on integrating climate-related risks into the fi-
nancial system and incorporating broader Envi-
ronmental, Social, and Governance (ESG) risks
into the operations of financial institutions by
providing tools, expertise, and comprehensive
green guidelines. We created a variable called
Defactoit that takes a value of 1 if the central
bank engages in green activities in year t, and 0
otherwise.
Figure 1 illustrates the trends in the mean of
geographic complexity alongside green bank
regulation over the years. Both graphs show
that geographic complexity began at a rela-
tively high level in 1996, dipped shortly after,
and remained stable with slight fluctuations be-
tween 1998 and 2008. From 2009-2010, there
was a sharp increase in geographic complexity,
peaking around 2012 and staying high until
2018, after which a slight decline occurred,
though still elevated compared to earlier years.
In the first graph, the Mean of De Jure regula-
tion remains flat throughout the entire period,
indicating minimal changes in formal regula-
tions. Despite this, geographic complexity
continues to increase after 2010, suggesting
that the rise in complexity is influenced more
by practical factors and strategic decisions
than by changes in statutory regulations. In
the second graph, the mean of Defacto regula-