Legal system environment and banking risk

Ruiqi Yang and Man Guo

Finance Research Letters, 2025, vol. 75, issue C

Abstract: This study investigates the impact of the legal system environment—rule of law, government effectiveness, and political stability—on banking risk proxied by gross financial flows (GRFIN). Using panel data from 19 upper middle-income countries, we apply multiple econometric models. Macroeconomic variables such as trade openness, inflation rate and foreign direct investment have also been included. The results indicate that the scale of legal institutions has an even more pronounced negative relationship with banking risk. The interaction effects show that legal factors improve the level of resistance to macroeconomic fluctuations. In terms of policy implications, major factors stress institutional changes to strengthen governance and minimize the system risk of banking structures.

Keywords: Legal system environment; Rule of law; Government effectiveness; Political stability; Banking risk; Gross financial flows (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000583

DOI: 10.1016/j.frl.2025.106793

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