DO POLITICALLY CONNECTED BANKS PERFORM BETTER IN A DEMOCRATIC ENVIRONMENT?

Jiayuan Tian (), M. Kabir Hassan and Rashedul Hasan ()
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Jiayuan Tian: University of New Orleans, United State of America
Rashedul Hasan: Coventry University, United Kingdom

Journal of Central Banking Law and Institutions, 2024, vol. 3, issue 2, 239-260

Abstract: This paper elucidates the intricate relationship among bank performance, political connections, and the democratic environment. The existing body of evidence is notably limited in illustrating the impact of a democratic environment on bank performance. Our study examines a sample of 397 banks spanning 14 countries and districts, encompassing both politically affiliated and non-politically affiliated banks in both democratic and non-democratic settings. The empirical findings reveal a reduction in non-performing loans but an escalation in loan loss provision within a democratic environment. This phenomenon may be attributed to the diminished level of financial constraints prevalent in democratic settings. Furthermore, our investigation reveals that political connections exert a deleterious effect on the non-performing loans (NPL) ratio, coupled with a salutary impact on loan loss provision. Conclusively, our research identifies that the stock return of politically connected banks in democratic environments is inferior to their counterparts in non-democratic environments. Additionally, the non-performing loans ratio (NPL) of politically connected banks in democratic environments tends to be higher compared to their non-democratic counterparts. Conversely, the loan loss provision of politically connected banks in democratic environments tends to be lower than that in non-democratic environments. This nuanced analysis contributes to a more comprehensive understanding of the interplay between democratic environments, political connections, and bank performance..

Keywords: bank; democracy; loss loan provision; performance; political connection (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:idn:jclijn:v:3:y:2024:i:2b:p:239-260

DOI: 10.21098/jcli.v3i2.173

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