Institutions and credit risk in banking system: the case of emerging economies

Abstract

The extent literature has documented the determinants of bank credit risk, but does not pay much attention to institutions. This study fills this gap by investigating the effects of institutions on bank credit risk. Our data covers 33 emerging economies over the period of 2002 – 2013. Applying system GMM estimator for unbalanced panel data, the study finds interesting findings. On credit supply side, the effects of bank liquidity and bank profitability are negative, while the effects of bank capital and bank size and bank concentration are significantly positive, while the effect of real GDP growth rate is negative on credit demand side. Our main finding is that institutions have negative effects on bank credit risk. Notably, in the present of institutions, the interaction effects of bank liquidity, bank capital and bank size, bank profitability, and real GDP growth rate are strengthened. These results imply that improvements in institutions have important significances in controlling bank credit risk in emerging countries.