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Can good governance lower bank intermediation costs?

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  • Mariusz Jarmuzek
  • Tonny Lybek

Abstract

This paper argues that better governance practices can reduce the costs, risks and uncertainty of financial intermediation. Our sample covers 100 high-, middle- and low-income countries during 1996 to 2015. Using panel regressions accounting for endogeneity and cross-sectional dependance, we find that net interest margins of banks are lower if various governance indicators are better. Governance indicators range from comprehensive indices on the rule of law to more narrow indicators like ethics of private firms. The global financial crisis seems not to have had a strong impact except via credit risk. Finally, we estimate that potential annual savings from lower net interest margins could average almost 0,3 percent of GDP, had the governance indicators been at the top decile. These simulations lend credence to the intuition that better governance practices should reduce costs, risks and uncertainty.

Suggested Citation

  • Mariusz Jarmuzek & Tonny Lybek, 2020. "Can good governance lower bank intermediation costs?," Applied Economics, Taylor & Francis Journals, vol. 52(27), pages 2960-2976, May.
    • Handle: RePEc:taf:applec:v:52:y:2020:i:27:p:2960-2976
    DOI: 10.1080/00036846.2019.1697421
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    Cited by:

    1. Gross, Christian & Jarmuzek, Mariusz & Pancaro, Cosimo, 2021. "Macro-stress testing dividend income. Evidence from euro area banks," Economics Letters, Elsevier, vol. 201(C).
    2. Bismark Addai & Wenjin Tang & Adjei Gyamfi Gyimah & Kingsley Opoku Appiah, 2023. "Bank intermediation margins in transition banking domains: panel evidence from Africa," Economic Change and Restructuring, Springer, vol. 56(4), pages 2129-2167, August.

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