Abstract
Using data on 52 countries’ banking systems from 2005 to 2014, we explore how the legal and institutional environment influences banking system performance. Using panel data and controlling for financial and economic development indicators, we find evidence of several relationships related to banking system performance. First, a higher degree of legal protection for both lenders and borrowers positively affects banking system performance. Second, there is a positive relationship between the degree of law enforcement and banking system performance. Third, better regulatory quality positively affects banking system performance. Fourth, neither the degree of information sharing nor the control of corruption has a significant effect on banking sector performance. Finally, we find no significant differences in banking sector performance by type of economy.
Highlights
As a result of the global financial crisis and the Eurozone sovereign debt crisis, international organisations such as the Basel Committee, the World Bank and the International Monetary Fund have promoted reform programmes encompassing revised regulatory frameworks
Doing Business provides enlightening data on the reforms implemented between 2005 and 2018.1 The 186 economies covered by Doing Business implemented 462 reforms in areas related to obtaining credit,2 265 reforms related to the degree of law enforcement and/or contracts, 221 reforms designed to improve dealing with insolvency, and 213 reforms aimed at strengthening the legal protection of minority investors
We examine the impact of the control variables linked to both the macroeconomic environment and the banking industry, and especially the effect of the legal and institutional environment variables with respect to our performance variable measured as the return on assets (ROA)
Summary
As a result of the global financial crisis and the Eurozone sovereign debt crisis, international organisations such as the Basel Committee, the World Bank and the International Monetary Fund have promoted reform programmes encompassing revised regulatory frameworks. A clear legal framework, an efficient judicial system, a solid macroeconomic equilibrium and adequate supervision can attenuate the effect of channels of contagion in financial crisis events (Anginer, Cerutti, & Peria, 2017; Dungey & Gajurel, 2015) They can improve investor confidence about information quality in capital markets (Baginski, Hassell, & Kimbrough, 2002) and increase value creation in several investment opportunities and dimensions (Aragon-Mendoza, del Val, & Roig-Dobon, 2016; Barba-Sanchez & Atienza-Sahuquillo, 2017; Durnev & Kim, 2005; Ribeiro Soriano, Roig Dobon, & Tansky, 2010). Aspects such as the size of the capital market, the concentration of the banking industry as well as the legal and institutional system shed light on the differences observed in different countries (Anginer, DemirgucKunt, Huizinga, & Ma, 2018; De la Torre, Ize, & Schmukler, 2012)
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