The Effect of Institutional Quality on the Relationship between Banking Stability and Marketization: The Case of Iran

Document Type: Research Paper

Authors

Department of Economics, Shiraz University, Shiraz, Iran.

Abstract

Banking system is considered as one of the most important economic sectors of every country. Because of the dependency between the performances of different sectors in economy, instability in banking sector will lead to disorder in all the other economic sectors. Marketization can influence banking stability. The primary objective of the present study is to investigate the relationship between marketization and banking stability in Iran. This study investigates the effect of institutional quality on the relationship between marketization and banking stability. Accordingly, the Generalized Method of Moments (GMM) and Panel Threshold Regression (PTR) techniques were used to estimate the models. The results of GMM indicated a decrease in banking stability after marketization. An improvement in institutional quality, however, could improve the relationship between marketization and banking stability. The results obtained by the PTR analysis revealed that institutional quality had a threshold value which could affect the relationship between marketization and banking stability and led to different relationships between marketization and banking stability under different regimes

Keywords


References

Alawode, A., & Al-Sadek, M. (2008). What is financial stability? Financial Stability Paper Series, Central Bank of Bahrain. 1- 26.

Allen, F., & Gul, X. (2011). Corporate governance and intra-group transactions in European bank holding companies during the crisis, Vol. 14. Global Banking, Financial Markets and Crises.

Altman, E. I. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. Journal of Finance, 23(4), 189–209.

Anginer, D., Demirguc-Kunt, A., & Zhu, M. (2011). How does bank competition affect systemic stability? Journal of Financial Intermediation, 23, 1-26

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carol evidence and application to employment equation. Review of Economic Studies, 58, 117-142.

Bahmani, M., & Mirhashemi, S. (2015). Investigating the effect of banking marketing on the transfer of monetary policy from the duct of lending. Quarterly Journal of Applied Economics Theory, 2, 119-142.

Barth, J. R., Caprio, G., & Levine, R. (2009). Bank regulations are changing: For better or worse? World Bank Policy Research Working Paper, No 4646.

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87, 115-143.

Choi, I. (2002). Combination unit root test for cross-sectionally correlated panel. Hong Kong University of Science and Technology, 12.

Feng, Y., Hasan, I., & Marton, K. (2012). Institutional development and bank stability: Evidence from transition countries. Journal of Banking & Finance, 39, 160-176.

Doll, M. (2010). Bank concentration, competition, and financial stability. Tilburg University.

Hansen, B. E. (2000). Sample splitting and threshold estimation. Econometrica, 68, 575–603.

Harris, R., & Tzavalis, E. (1999). Inference for unit roots in dynamic panels where the time dimension is fixed. Journal of Econometrics, 91, 201-226.

Hou, X., & Wang, Q. (2016). Institutional quality and banking marketization and bank stability: Evidence from China. Economic System, 40, 539-551.

Hu, J., Li, Y., & Chiu, Y. (2004). Ownership and nonperforming loans: Evidence from Taiwan banks. Developing Economies, 42(3), 1-35.

Hurlin, C., & Mignon, V. (2007). Second generation panel unit root test, Halshs Archives, 1-24.

Im, K., Pesaran, M. H., & Shin, Y. (1997). Testing for unit roots in heterogeneous panels. Journal of Econometrics, 115, 53-74.

Ishibashi, I., & Matsumura, T.  (2009). Privatization and entries of foreign enterprises in a differentiated industry. Japan Economics, 98, 203-219.

Jin, Y., Kanagratnam, K., Lobo, G., & Mathieu, R. (2017). Social capital and bank stability. Journal of Financial Stability, 32, 99–114.

Khoshnoodi, A., Sabagh, M., Yavari, K., & Hosseininasab, E. (2012). Financial banking vulnerability assessment and its effective factors using the Z-Score index. Journal of Economic Research and Policy, 7, 79-100.

Kutlu, V. (2009). Panel cointegration analysis to exchange rate determination: monetary model versus Taylor rule model. Doctoral Dissertation, Bilkent University.

Levin, A., & Lin, C. (1992). Unit root test in panel data: Asymptotic and finite sample Properties. University of California at San Diego, Discussion Paper, 92-93.

Maddala, G. S. & Wu, S. H.  (1999). A comparative study of unit root tests with panel data and a new simple test. Oxford Bulletin of Economics and Statistics (Special Issue), 0305-9049.

Mishkin, F. (1998). International experiences with different monetary policy regimes. Journal of Monetary Economics, 43(3), 579-605.

North, D. (1996). Institutions, organizations and market competition. NBER Working Papers from National Bureau of Economic Research, 6965.

Moon, H., & Perron, B. (2004). Testing for a unit root in panels with dynamic factors. Journal of Econometrics, 122, 81-126.

Pesaran, M. H. (2003). A simple panel unit root test in the presence of cross sectional dependence. Mimeo, University of Southern California.

Pesaran, M. H. (2004). General diagnostic tests for cross-section dependence in panels. Cambridge Working Papers in Economics, 0435.

Pesaran, M. H. (2015). Testing weak cross-sectional dependence in large panels. Econometric Reviews, 34(6-10), 1089-1117.

Poostinchi, M., Tahsili, H., & Karimzadeh, M. (2016). Impact of competition in the banking industry on banking stability, Economics, 11, 123-145.

Taqavi, M., Ahmadian, A., & Kianvan, M. (2013). An analysis of the effect of corporate governance on the stability of the banking system in developing countries. Journal of Financial Analysis, 19, 45-76.

Zalbagi, H. (2014). Factors affecting stability in Iranian banking network. Quarterly Journal of Monetary-Banking Research, 20, 307-327.

Zamanzadeh, H., & Al-Husseini, S. (2016). Iran's economy: In straits of development. Vol .1. Tehran, Iran: Markaz Press [In Persian].