Economy-Wide Corruption and Bad Loans in Banking: International Evidence

Abstract

This study investigates the effects of economy-wide corruption on bad loans across a large sample of countries. The evidence reveals that greater corruption is associated with more bad loans. Loan defaults are lower in faster growing economies, in economies with higher lending rates and in nations in the Euro zone, ceteris paribus. However, other institutional controls, including central bank autonomy, financial underdevelopment, bank-based economies and transition nations fail to show appreciable effects on the incidence of bad loans. The findings are robust to an alternate corruption measure and to endogeneity of corruption. Policy implications are discussed.