Corruption and Bank Conduct: International Evidence

Abstract

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.

Keywords: corruption, interest rate, nonperforming loans, liquid reserves, central bank autonomy, bank-based economies

JEL Classification: K42, G2, G3