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.

KEYWORDS:

• Political uncertainty
• bank efficiency
• ownership structure
• SFA

Disclosure statement

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

Notes

1. The emerging markets in our sample are based on the MSCI Emerging Markets Indices 2007. Emerging Asia includes Mainland China, Taiwan, India, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, and Thailand. Emerging Americas include Argentina, Brazil, Colombia, and Peru. In Europe, emerging markets include Czech Republic, Hungary, Poland, Russian Federation, and Romania. Other emerging economies include South Africa and Turkey.

2. The internet sources include http://www.globalelectionsdatabase.com/, http://www.electionresources.org/, http://www.electiondataarchive.org/, and http://www.ipu.org/parline-e/parlinesearch.asp.

3. Barth et al. (2006) use cross-country data to examine the relationship between political systems and bank supervisory and regulatory systems.

4. Kaufmann et al. (2010) summarize the Worldwide Governance Indicators (WGI) project that covers over 200 countries and territories with different dimensions of governance starting in 1996.

5. Some studies have used the SFA method for efficient measurements. Specifically, Aigner et al. (1977) and Meeusen and Van den Broeck (1977) employed the stochastic frontier approach, which contains errors in the assumptions of a deterministic production frontier.

6. Since behavioral assumptions such as cost minimization are appropriate for banks, it seems like the best way to use a cost frontier model for the estimation.

7. Both Huang et al. (2011) and Sun and Chang (2011) described the previously analyzed Wang model as the best specification model among eight well-known stochastic frontier models.