BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 3/2009:
Does corruption hamper bank lending? Macro and micro evidence
Laurent Weill ()
Abstract: The aim of this paper is to analyze the effect of
corruption in bank lending. Corruption is expected to hamper bank lending,
as it is closely related to legal enforcement, which has been shown to
promote banks’ willingness to lend. Nevertheless the similarities between
the consequences for bank lending of law enforcement and corruption are
misleading, as they consider only judiciary corruption. Corruption can also
occur in lending and may then be beneficial for bank lending via bribes
given by borrowers to enhance their chances of receiving loans. This
assumption may be validated particularly in the presence of pro-nounced
risk aversion by banks, resulting in greater reluctance on the part of
banks to grant loans. We perform country-level and bank-level estimations
to investigate these assump-tions. Corruption reduces bank lending in both
sets of estimations. However, bank-level estimations show that the
detrimental effect of corruption is reduced when bank risk aver-sion
increases, even leading at times to situations wherein corruption fosters
bank lending. Additional controls show that corruption does not increase
bank credit by favoring only bad loans. Therefore, our findings show that
while the overall effect of corruption is to hamper bank lending, it can
alleviate firm’s financing obstacles.
Keywords: corruption; bank; financial development; (follow links to similar papers)
JEL-Codes: G20; O50; (follow links to similar papers)
31 pages, April 20, 2009
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