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 assume 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 fat data (17 indices of institutional environment) is reduced by Bayesian model averaging. Additionally, we differentiate between the banks related to their specific conditions, especially size and location. Special emphasis is placed on the dynamic of probability changes to involve selected variables into the model after the financial crisis. The empirical results confirm positive impact of economic activity and selected institutions related to globalization, freedom, government spending, low corruption and low marginal tax rates. We also identify a positive impact of increasing financial assets of central banks on the lending activity of small banks.