The Impact of Institutional Quality on Bank Lending Activity: Evidence from Bayesian Model Averaging

The paper investigates the link between macroeconomic shocks, the institutional environment and the responses of bank lending activities to the financial crisis. We hypothesize that property rights and the enforcement of rules are crucial for well-functioning markets, especially in transition and emerging market economies where new institutions were created. The empirical analysis adopts panel regression models with bank fixed effects. Our rich dataset contains 10,565 banks from 66 countries across the whole world. The uncertainty caused by selection of regressors is reduced by Bayesian model averaging. In addition, we put a special emphasis on the dynamic changes of probability to involve selected variables into the model. We identify ownership structures and confirm inverse effects of institutional environment on the government and private banks. We show negative effects of economic freedom, openness and globalization on the lending activity of government banks while low regulations increase lending activity of private banks. We argue that economic and financial openness reduces information asymmetries and increase competition in private banking sector which results in lower net interest margins. On the contrary, lending activity of government bank is supported by political constraints.