Country governance nexus with the financial stability of banks: The moderating effect of country’s income level
DOI:
https://doi.org/10.17015/ejbe.2024.034.07Keywords:
Country governance, Financial stability, Country’s income level, Banking sector, Moderating effect.Abstract
This study examines the relationships between a country’s governance indicators and bank financial stability and the moderating effect of a country’s income level on those relationships. This study uses unbalanced country-level panel data of 110 countries from the World Bank from 2010 to 2021. Ordinary least squares (OLS) estimation fails to pass heteroskedasticity, first-order autocorrelation, and cross-sectional dependence tests. To ensure robustness in the estimation, this study uses panel corrected standard error (PCSE) estimation model for the direct and moderating effect analysis. The findings show that banks’ financial stability mostly depends on bank-specific factors, and better country governance enhances bank financial stability. This study also finds that a country’s high-income, upper-middle-income, and lower-middle-income moderate the relationships between a country’s governance indicators and the bank’s financial stability. This finding will help bankers, regulators, and policymakers adopt effective governance policies to strengthen the financial stability of the banking sector. Unlike previous studies, this study overcomes the limited regional context and scope of measuring the relationships between a country’s governance indicators and a bank’s financial stability and also measures the moderating effect of the country’s income level on the same.
References
Abad-González, J., Gutiérrez-López, C., & Salvador, A. (2018). Banking solvency determinants in the EU: a model based on stress tests. Applied Economics Letters, 25(18), 1296–1300. https://doi.org/10.1080/13504851.2017.1418071
Adusei, M. (2015). The impact of bank size and funding risk on bank stability. Cogent Economics and Finance, 3(1), 1111489. https://doi.org/10.1080/23322039.2015.1111489
Ali, M., & Puah, C. H. (2019). The internal determinants of bank profitability and stability: An insight from banking sector of Pakistan. Management Research Review, 42(1), 49–67. https://doi.org/10.1108/MRR-04-2017-0103
Almaqtari, F. A., Hashid, A., Farhan, N. H. S., Tabash, M. I., & Al-ahdal, W. M. (2022). An empirical examination of the impact of country-level corporate governance on profitability of Indian banks. International Journal of Finance and Economics, 27(2), 1912–1932. https://doi.org/10.1002/ijfe.2250
Amadi, A., Adetiloye, K. A., Babajide, A., & Amadi, I. (2021). Banking system stability: A prerequisite for financing the Sustainable Development Goals in Nigeria Related papers. Banks and Bank Systems, 16(2), 103–118. https://doi.org/10.21511/bbs.16(2).2021.10
Asteriou, D., Pilbeam, K., & Tomuleasa, I. (2016). The Impact of Economic Freedom, Business Regulation and Corruption on Bank Profitability and Bank Stability: Evidence from Europe. In City Research Online. http://openaccess.city.ac.uk/16839/
Azmi, W., Ali, M., Arshad, S., & Rizvi, S. A. R. (2019). Intricacies of competition, stability, and diversification: Evidence from dual banking economies. Economic Modelling, 83, 111–126. https://doi.org/10.1016/j.econmod.2019.02.002
Breitung, J., Kripfganz, S., & Hayakawa, K. (2022). Bias-corrected method of moments estimators for dynamic panel data models. Econometrics and Statistics, 24, 116–132. https://doi.org/10.1016/j.ecosta.2021.07.001
Cerulli, G., D’Apice, V., Fiordelisi, F., & Masala, F. (2020). Benchmarking non-performing loans. European Journal of Finance, 26(16), 1591–1605. https://doi.org/10.1080/1351847X.2020.1794923
Chand, S. A., Kumar, R. R., & Stauvermann, P. J. (2021). Determinants of bank stability in a small island economy: a study of Fiji. Accounting Research Journal, 34(1), 22–42. https://doi.org/10.1108/ARJ-06-2020-0140
Chen, Y. (2022). Bank interconnectedness and financial stability: The role of bank capital. Journal of Financial Stability, 61, 101019. https://doi.org/10.1016/j.jfs.2022.101019
DaSouza, D., Martin, K., Abraham, P., & Davis, G. (2023). COVID-19 and financial institution stability: stress testing the Eastern Caribbean currency union. Journal of Financial Regulation and Compliance, 31(5), 525–545. https://doi.org/10.1108/JFRC-10-2022-0123
Demirgüç-Kunt, A., Pedraza, A., & Ruiz-Ortega, C. (2021). Banking sector performance during the COVID-19 crisis. Journal of Banking and Finance, 133, 106305. https://doi.org/10.1016/j.jbankfin.2021.106305
Dietrich, A., & Wanzenried, G. (2014). The determinants of commercial banking profitability in low-, middle-, and high-income countries. Quarterly Review of Economics and Finance, 54(3), 337–354. https://doi.org/10.1016/j.qref.2014.03.001
Eichler, S., & Sobański, K. (2016). National politics and bank default risk in the eurozone. Journal of Financial Stability, 26, 247–256. https://doi.org/10.1016/j.jfs.2016.07.008
El-Chaarani, H., & El-Abiad, Z. (2022). The impact of public legal protection on the internal corporate governance efficiency in banking sector. Journal of Economic and Administrative Sciences, 40(3), 482-515. https://doi.org/10.1108/JEAS-12-2021-0254
Ghosh, P. K., Khatun, M., & Tarafdar, P. (2018). Bankruptcy Via Earning Volatility: Does it Integrate in Financial Institutions? Asian Economic and Financial Review, 8(1), 52–62. https://doi.org/10.18488/JOURNAL.AEFR.2018.81.52.62
Hoechle, D. (2007). Robust standard errors for panel regressions with cross-sectional dependence. Stata Journal, 7(3), 281–312. https://doi.org/10.1177/1536867x0700700301
Kamarudin, F., Mohamad Anwar, N. A., Md. Nassir, A., Sufian, F., Tan, K. M., & Iqbal Hussain, H. (2022). Does country governance and bank productivity Nexus matters? Journal of Islamic Marketing, 13(2), 329–380. https://doi.org/10.1108/JIMA-05-2019-0109
Kamarudin, F., Sufian, F., & Md. Nassir, A. (2016a). An analysis of country governance impact to the revenue efficiency of Islamic and conventional banks in GCC countries. International Conference on Social Science and Management, 10-12 May 2016, Osaka, Japan. .
Kamarudin, F., Sufian, F., & Md. Nassir, A. (2016b). Does country governance foster revenue efficiency of Islamic and conventional banks in GCC countries? EuroMed Journal of Business, 11(2), 181–211. https://doi.org/10.1108/EMJB-06-2015-0026
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2009). Governance Matters VIII : Aggregate and Individual Governance Indicators 1996-2008 , World Bank Policy Research Working Paper No. 4978. http://econ.worldbank.org. https://doi.org/10.1596/1813-9450-4978
Kaufmann, D., Kraay, A., & Mastruzzi, M. (2010). The worldwide governance indicators: Methodology and analytical issues, World Bank Policy Research Working Paper No. 5430. https://doi.org/10.1017/S1876404511200046
Kharel, R. S., & Pokhrel, D. R. (2012). Does Nepal’s Financial Structure Matter for Economic Growth? NRB Economic Review, 24(2), 31–36. https://ideas.repec.org/p/nrb/wpaper/nrbwp201210.html. https://doi.org/10.3126/nrber.v24i2.52725
Lee, C. C., Olasehinde-Williams, G., & Olanipekun, I. (2020). Financial systems, regulatory quality, and economic growth. The Journal of International Trade & Economic Development, 30(2), 246–274. https://doi.org/10.1080/09638199.2020.1847172
Mallows, C. L. (1986). Augmented partial residuals. Technometrics, 28(4), 313–319. https://doi.org/10.2307/1268980
Mateev, M., Sahyouni, A., & Al Masaeid, T. (2024). Bank performance before and during the COVID-19 crisis: Does efficiency play a role? Review of Managerial Science, 18(1), 29-82. https://doi.org/10.1007/s11846-022-00611-y
Moundigbaye, M., Rea, W. S., & Reed, W. R. (2018). Which panel data estimator should i use?: A corrigendum and extension. Economics, 12, 1–31. https://doi.org/10.5018/economics-ejournal.ja.2018-4
Ozili, P. K. (2018). Banking stability determinants in Africa. International Journal of Managerial Finance, 14(4), 462–483. https://doi.org/10.1108/IJMF-01-2018-0007
Pathrose, E. P. (2022). The Real Effect and Consequence of Regulation Reform in Corporate Finance and Banking. ECS Transactions, 107(1), 4195. https://doi.org/10.1149/10701.4195ECST
Pesaran, M. H. (2015). Testing weak cross-sectional dependence in large panels. Econometric reviews, 34(6-10), 1089-1117. https://doi.org/10.1080/07474938.2014.956623
Ramakrishna, S., & Kalpakam, G. (2022). Contagion Effects of Covid-19 on Select Stock Market Indices. Eurasian Journal of Business and Economics, 15(30), 45–61. https://doi.org/10.17015/ejbe.2022.030.03
Roodman, D. (2009). How to do xtabond2: An introduction to difference and system GMM in Stata. The Stata Journal, 9(1), 86–136. https://doi.org/10.1177/1536867X0900900106
Sarafidis, V., & Robertson, D. (2009). On the impact of error cross-sectional dependence in short dynamic panel estimation. The Econometrics Journal, 12(1), 62–81. https://doi.org/10.1111/j.1368-423X.2008.00260.x
Schiantarelli, F., Stacchini, M., & Strahan, P. E. (2020). Bank Quality, Judicial Efficiency, and Loan Repayment Delays in Italy. Journal of Finance, 75(4), 2139–2178. https://doi.org/10.1111/jofi.12896
Shome, S., & Verma, S. (2020). Financial Distress in Indian Aviation Industry: Investigation Using Bankruptcy Prediction Models. Eurasian Journal of Business and Economics, 13(25), 91–109. https://doi.org/10.17015/ejbe.2020.025.06
Silva, A. F. (2019). Strategic Liquidity Mismatch and Financial Sector Stability. The Review of Financial Studies, 32(12), 4697–4733. https://doi.org/10.1093/rfs/hhz044
Toader, T., Onofrei, M., Popescu, A. I., & Andrieș, A. M. (2018). Corruption and Banking Stability: Evidence from Emerging Economies. Emerging Markets Finance and Trade, 54(3), 591–617. https://doi.org/10.1080/1540496X.2017.1411257
Tölö, E., & Virén, M. (2021). How much do non-performing loans hinder loan growth in Europe? European Economic Review, 136, 103773. https://doi.org/10.1016/J.EUROECOREV.2021.103773
Xiazi, X., & Shabir, M. (2022). Coronavirus pandemic impact on bank performance. Frontiers in Psychology, 13. 1014009. https://doi.org/10.3389/fpsyg.2022.1014009
