Political institutions and bank risk-taking behavior

Journal article

Ashraf, B. (2017). Political institutions and bank risk-taking behavior. Journal of Financial Stability. 29, pp. 13-35. https://doi.org/10.1016/j.jfs.2017.01.004
AuthorsAshraf, B.
Abstract

This paper examines the impact of political institutions on bank risk-taking behavior. Using an international sample of banks from 98 countries over the period 1998–2007, I document that sound political institutions stimulate higher bank risk-taking. This is consistent with the hypotheses that better political institutions increase banks’ risk by boosting the credit market competition from alternative sources of finance and generating the moral hazard problems due to the expectation of government bailouts in worst economic conditions. While it is contrary to the hypotheses that better political institutions decrease banks’ risk by lowering the government expropriation risk and the information asymmetries between banks and borrowers. The results are robust to a number of sensitivity tests, including alternative proxies of bank risk-taking and political institutions, cross-sectional bank- and country-level regressions, endogeneity concerns of political institutions, country income levels, explicit deposit insurance schemes and sample extension from 1998 to 2014. I also examine the interdependence between political and legal institutions and find that political and legal institutions complement each other to influence bank risk-taking behavior.

Year2017
JournalJournal of Financial Stability
Journal citation29, pp. 13-35
PublisherElsevier
ISSN1572-3089
Digital Object Identifier (DOI)https://doi.org/10.1016/j.jfs.2017.01.004
Web address (URL)http://www.scopus.com/inward/record.url?eid=2-s2.0-85013213158&partnerID=MN8TOARS
Publication dates
Online27 Jan 2017
Publication process dates
Accepted19 Jan 2017
Deposited17 Nov 2022
Accepted author manuscript
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Open
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