The Distorting Effects of Corruption on Financial Stability and Economic Growth: Evidence from Russian Banks Using a PVAR Approach

ABSTRACT

In this study, we use a panel vector autoregression approach to investigate how financial stability, measured by nonperforming loans (NPLs), interacts with profitability, leverage, loan growth, and economic growth in an improving or worsening corruption framework. The results underline the effects of changes in corruption on banks’ management quality and on the time-persistence of NPLs. A shock to NPLs reduces profitability, loan growth, and GDP. In a worsening corruption environment, these effects are stronger and more time-persistent, confirming the distorting effects of corruption on financial stability and growth. In contrast, NPLs decline due to a shock to profitability, leverage, and GDP.

KEYWORDS:

• Bank Risk Management
• Corruption
• Financial Stability
• Nonperforming Loans
• PVAR

JEL Classification:

• xxx

Keywords:

• G20
• G21

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. The Corruption is defined by Transparency International (TI) as “…the manipulation of policies, institutions and rules of procedures in the allocation of resources and financing by political decision makers, who abuse their position to sustain their power, status and wealth.”

2. for more details, see Dong et al. (2014), Hu et al. (2014), Breuer (2006).

3. For the importance of loan category on NPLs studies see also Abid, Ouertani, Zouari, and-Ghorbe (2014).

4. Data sources: www.imf.org and www.worldbank.org

5. For the purposes of our analysis we have obtained the cubic root of the variables corresponding to bank specific data as did Miles et al. (2013). After that, we deducted the extreme values below the 5^th and above the 95^th percentile.

6. The results of the Fisher-Type Panel Unit Root are not presented for economy of space reasons. They are available from the authors upon request.