Business & Investment

U.S. banks promised billions of dollars to charities in 2020 in the COVID-19 pandemic — what’s behind their generosity

US banks have promised billions of dollars to help communities struggling in 2020. New research suggests that huge amounts can be profitable, especially if you are doing business in a highly competitive market.

In short, they make good names for themselves that resonate with existing and future customers.

It’s according to a recently published study American Economic Association Annual Meeting.. Banks that donate money to nonprofits have concluded that they will be rewarded with increased profits and increased market share.

“Many people wonder,’Well, can a company really do well by doing good?’ In this context, the answer is yes. In this context, doing good is It really benefits the future, “said Simon Schu, a researcher at the Australian Institute for Socially Responsible Investment, an independent research group.

He co-authored the study with Choi Seung-ho, an assistant professor of economics and finance at Queensland Institute of Technology, and Rafael Jonghyun Park at the University of New South Wales.

“”
“In this context, doing good things actually leads to future benefits.”


— Simon Xu, co-author of “Strategic Use of Corporate Philanthropy: Evidence from Bank Donations”

Xu and his co-authors were interested in why banks engage in corporate philanthropy, whether it affects bank performance, and how it affects them. To track the relationship, researchers examined tax-deductible donations made by 102 US banks from private foundations to nonprofits.

These contributions are published on the IRS and are relatively easy to track down. The author reviewed more than 92,000 donations made between 2000 and 2015 and examined bank balance sheet and branch level deposit data.

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2020 was a big year for bank donations

Researchers wanted to investigate the philanthropy of banks’ companies, as banks are the most active of the corporate philanthropists and are often ranked high on the list of the most generous companies in the United States. ..

Two crises, the coronavirus pandemic and the national reputation for racial injustice, made 2020 a prominent year for bank philanthropy.Bank of America
BAC,
-2.21%
,
For example Announced $ 100 Million to Help Local Communities Recover from Pandemic.. Bank of America did not respond to requests for comment.

Wells Fargo
WFC,
-3.02%

In March 2020, the Private Foundation said it would make a $ 175 million donation “to help stabilize food, shelter, SMEs and housing, and to provide support to public health organizations.” In July 2020, the company announced a $ 400 million effort to help small businesses by donating to the community the processing fees they would have received from the government to participate in the Paycheck Protection Program.

“”
“More than ever, businesses have a responsibility to help strengthen and solve some of the world’s most pressing challenges.”


— Janice Baudler, Chairman of the JP Morgan Chase Foundation

Nate Hurst, Head of Social Impact and Sustainability at Wells Fargo, said in a statement that banks are engaged in philanthropy. “Because we believe that what we do when people are in trouble is right and we improve the lives of our neighbors.”

JP Morgan Chase and Company
JPM,
-1.11%

A spokeswoman said in October 2020 that he promised $ 30 billion in October 2020 to promote racial equality and previously invested $ 200 million in the recovery of Detroit by 2022. promised.

“More than ever, companies are responsible for helping companies strengthen and solve some of the world’s most pressing challenges,” Janis Bowdler, chairman of the JPMorgan Chase Foundation, said in an email statement. Stated. “A fair and functioning economy for everyone, including colorful communities, low-income families, and people who have been out of service for decades, is the community, employees, and people we serve. And it’s good for the business. ”

Competition between banks seemed to drive donations

A study by Xu and hi collaborators found that the more competitive the banking market, the more likely banks are to donate to nonprofits. To manage other factors, such as a bank making more donations than its competitors due to its profitability, researchers focused on the donations made by banks in the aftermath of a natural disaster and are close. Compared to the donations made by the bank. A county where no natural disasters have occurred.

The authors theorized that natural disasters created a situation in which banks inevitably donate rather than make choices.

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When banks moved from a “nearly monopolistic” market to a “perfectly competitive” market, the odds of a bank making a donation increased by 39.2%.

Researchers have also focused on where antitrust law guarantees competition between bank branches after a bank merger. They found that when banks moved from a “nearly monopolistic” market to a “perfectly competitive” market, their chances of making donations increased by 39.2%.

“The highly competitive banking environment is actually driving their donation efforts,” Xu told MarketWatch. In a highly competitive industry, such as banks, researchers theorize that donating to nonprofits is one way for banks to stand out from their rivals in the fight to attract customers.

“”
“Bank donations can certainly be altruistically motivated, but our results show that these donations have a strategic component.”


— Author of “Strategic Use of Corporate Philanthropy: Evidence from Bank Donations”

The survey covers about 90% of the US banking industry, and the findings are “generalizable,” Xu said. This paper has not been published yet.

The findings on possible motives for bank philanthropy led to another question. Did these donations benefit the bank? Researchers have found a measurable impact on bank profits.

“Our results show that banks that donate to non-profit organizations in disaster-affected counties have a higher share of the local deposit market after a natural disaster than banks that do not donate.” The author writes.

Donations made a measurable difference in a bank’s market share and profits

In fact, the bank’s deposit market share donated after a natural disaster averaged 0.5% higher in the year immediately following the disaster. This increase in deposit market share lasted up to two years after the donation.

Researchers have found that this has led to higher profits, with donating banks making an average of $ 3.5 million to $ 7.3 million more profits the following year than non-donating banks. Donations also seem to influence bank lending activities. After the natural disaster, the banks that made the donations earned more deposits and then formed more local mortgages.

“Bank donations can certainly be altruistically motivated, but our result is that these donations have a strategic component that has a significant impact on the bank’s local deposit market share. Shows, “the author writes.

Attract “socially responsible” customers

According to researchers, donating banks may have increased their market share as they were able to establish ties with nonprofits and later establish professional relationships. The news of the donation may also have helped to attract “socially responsible” customers who want to do business with banks that the bank perceives to be ethical.

Although not covered in the treatise, Xu said in an interview that corporate donations could be a cheaper way for banks to improve their position in the market compared to traditional methods. .. Marketing and advertising costs are combined, but donations to nonprofits are tax deductible and are often covered by the media for free. “It’s probably not only cheap, but it’s a more effective way to reach the general public and get the public’s attention,” Xu said.

U.S. banks promised billions of dollars to charities in 2020 in the COVID-19 pandemic — what’s behind their generosity

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