Après le déluge: Institutions, the Global Financial Crisis, and Bank Profitability in Transition

While the determinants of bank profitability have been well-explored, the influence of institutions on bank performance is less understood, especially in the transition context. Given the presence of a financial crisis such as the one that struck the global economy from 2007 onward, did the underlying institutional structure of a country help to mitigate the effects of the crisis on banks? Utilizing a new database of 1600 banks across 30 transition economies, this paper applies Bayesian model averaging, fixed-effects, and IV-GMM methodology to test the effect of institutions on bank profitability in a crisis period. Results are conclusive across models that investor-specific property rights aided bank profitability during the crisis. The effect of democracy on banks is much more ambiguous but appears to negatively influence profitability indirectly through interest group channels and bank concentration. These results hold across a variety of specifications and robustness tests. Copyright The Author(s) 2015