Corruption and Bank Conduct: International Evidence
Posted: 18 Jan 2010
Date Written: January 18, 2010
Using recent cross-national data on more than 100 nations, this study investigates the financial effects of economy-wide institutional quality (corruption) on various bank activities: (i) the ratio of nonperforming loans to total loans; (ii) the capital-to-assets ratio; (iii) the liquid-reserves-to-assets ratio; and (iv) interest rate spread. In the context of the banking and financial sectors, corruption can proxy for a number of exogenous influences, including institutional quality and riskiness in a country. Other things being the same, monitoring and enforcement institutions are particularly weaker in more corrupt nations (see Becker and Stigler, 1974). This might imply lax monitoring of perpetrators of financial fraud or more lenient punishment in these countries. Corruption also increases the chances of apprehending innocent people. Furthermore, bad institutional quality can increase the risk of bank defaults when bank managers in corrupt nations view the probability of apprehension as partly endogenous (see Lambsdorff and Teksoz, 2004). Banking-sector institutions therefore address their transparency and governance guidelines by taking account of sector-specific factors. Notwithstanding significant qualitative and quantitative differences, the evidence reveals that greater corruption is associated with higher- nonperforming loans, capital, liquidity, and interest rate spreads. While membership in the European Union has a stabilizing effect, however, the central-bank autonomy does not matter. These findings are robust to an alternate corruption measure and to potential endogeneity. Additionally, bank-based economies have a lower capital-asset ratio and lower interest rate spreads, while financially underdeveloped nations tend to have higher liquid reserves and higher interest rate spreads. The paper also discusses policy implications.
Keywords: corruption, interest rate, nonperforming loans, liquid reserves, central bank autonomy, bank-based economies
JEL Classification: K42, G20, G30
Suggested Citation: Suggested Citation