On the relationship between corruption and bank lending activity: European evidence

Abstract

Purpose

This paper aims to study the effect of country-level perceptions of corruption on commercial banks’ lending activity over the importance of loans and the quality of loan portfolios of banks in Europe.

Design/methodology/approach

The paper uses country-level perceptions of corruption scores from Transparency International, individual bank-specific data from ORBIS and macroeconomic data from the World Bank. The sample is composed of 640 commercial banks in 42 European countries from 2013 to 2019. The authors estimate, by pooled OLS, the relationship between corruption and the importance of loans and the quality of the banks’ loan portfolios. In addition, several robustness tests reinforce the results.

Findings

The results show that corruption negatively impacts the importance of loans in bank assets and positively impacts the proportion of bad loans. In addition, trade openness increases the weight of loans and the weight of nonperforming loans. Bank size, capital and risk also affect bank lending activity. Finally, European Monetary Union (EMU) membership reinforces the negative (positive) effect on loans (bad loans).

Research limitations/implications

The results highlight the importance of fighting corruption. Governments, regulators and banks benefit from pursuing transparency-oriented policies to decrease the perception of corruption and foster economic development.

Originality/value

The literature on the impact of corruption on bank lending activity focuses mainly on high-corruption countries. This paper studies the European case, scarcely investigated in the literature, in the aftermath of two international financial crises and when significant regulatory transformations in banking supervision were instituted in the EMU countries.

Citation

Sol Murta, F. and Gama, P.M. (2023), "On the relationship between corruption and bank lending activity: European evidence", Journal of Financial Crime, Vol. 30 No. 6, pp. 1770-1783. https://doi.org/10.1108/JFC-10-2022-0253