Banking performance and institutional quality: Evidence from dynamic panel data analysis

Abstract

AbstractThis study aims to pioneer in investigating the role of two major components of governance (i.e., corruption and political stability) in banking performance in the case of 21 emerging countries. Using time‐series data from 2010 to 2017 with annual frequency, this study uses a comprehensive measure that assesses banking performance called capital‐adequacy, asset‐quality, management‐efficiency, earnings and liquidity (CAMEL). However, for empirical analysis, this study utilises the dynamic panel data modelling technique, that is, System‐GMM and Pooled‐OLS and margins plot, for robust and policy‐oriented outcomes. We find that higher corruption and political instability negatively affect asset quality, earnings, and management efficiency and positively affect the banks' liquidity. More interestingly, higher corruption is more harmful than lower political stability. It negatively affects the banking performance directly and intensifies the impact of the lower stability on banking performance. This study has implications for regulators, bankers, and investors.