The Influence of political uncertainty on commercial banks in emerging market countries

Abstract

An emerging question in the midst of this debate is that if and how political uncertainty may affect bank performance in emerging markets where corporate governance is often intervened by state financial institutions in local banking sectors. This paper uses a new dataset from 20 emerging economies to reassess the relationship between political uncertainty and bank efficiency. Using a stochastic frontier approach (SFA) to estimate bank cost efficiency, we find evidence that political uncertainty during election years tends to impede bank efficiency. Our results also reveal that commercial banks located in civil law countries and parliamentary systems tend to be less efficient during election years, while changes in efficiency among banks in common law countries and presidential systems are not driven by political uncertainty. These findings highlight the implications of the political environment for bank efficiency and are relevant to bank regulators who are considering additional regulations on bank management.