How Does Corruption Undermine Banking Stability? A Threshold Nonlinear Framework

This study assess the effect of corruption on the occurrence of banking crisis for a sample of 38 countries over the period 2000 – 2017. We consider both the direct and the indirect channels through which corruption might affect the occurrence of banking crisis. We also check using a threshold regression approach for the existence of a corruption threshold driving the existence of a regime switching in our sample countries for both high-income and low-income countries. Estimation outcomes show robust support to suggest that overall, corruption increase the probability of banking crisis. The indirect effect estimation suggest that corruption negatively affects the banks' lending channel through excessive risk rather than their profitability channel. The panel threshold analysis provides evidence of a nonlinear corruption-banking stability relationship with the existence of two corruption-banking stability regimes. The study also provides evidence that corruption matter more for low-income than for high-income countries for their banking system stability