Regulatory and Institutional Determinants of Credit Risk Taking and Bank's Default in Emerging Market Economies: A Two Step Approach
Journal of Emerging Market Finance, Vol. 5, No. 2, 2006
43 Pages Posted: 26 Jul 2007
Regulatory and institutional environment is not without effect on bank's risk taking and therefore on bank's default. In this article, we investigate regulatory and institutional determinants of credit risk taking and bank's default probability in emerging market economies. Using a two step logit model applied to a database of banks from emerging economies, we confirm the role of the institutional and regulatory environment as a source of excess credit risk, which increases bank's default risk. In particular, the rule of law appears to be a crucial element of an efficient regulatory environment, which may reduce excessive risk taking incentives.
Keywords: Regulatory and institutional determinants, bank's default, credit risk, emerging market economies, two step logit model
JEL Classification: C35, G21, G28
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