Selectivity and Transparency in Social Banking: Evidence from Europe

How do social banks signal their social commitment to motivated funders? We hypothesize that two main channels are used: selectivity and transparency. We test these predictions using a rich dataset comprising balance-sheet information on 5,000 European banks over the period from 1998 to 2013. The results suggest that social screening leads social banks to higher project selectivity compared to mainstream banks. Social banks also tend to be more transparent than other banks. However, combining selectivity and transparency can result in excess liquidity. Overall, the empirical findings not only confirm our theoretical hypotheses, but also raise challenging issues regarding the management of social banks.