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Legal system environment and banking risk

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  • Yang, Ruiqi
  • Guo, Man

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.

Suggested Citation

  • Yang, Ruiqi & Guo, Man, 2025. "Legal system environment and banking risk," Finance Research Letters, Elsevier, vol. 75(C).
    • Handle: RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000583
    DOI: 10.1016/j.frl.2025.106793
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    References listed on IDEAS

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