Political regimes and bank interest margins

• Published in: Economic systems 2020-06, Vol.44 (2), p.100789, Article 100789
• Main Author: Lavezzolo, Sebastián
• Format: Article
• Language: English
• Subjects: Autocracies; Bank interest margins; Bank profitability; Bank spreads; Democracies; Financial systems; Political regimes
• ISSN: 0939-3625; 1878-5433
• DOI: 10.1016/j.ecosys.2020.100789

•This study investigates the impact of political regimes on bank interest margins through nonparametric (matching) and parametric methods.•Bank margins are expected to be lower in autocracies than in democracies because of an inherent credibility problem derived from despots’ arbitrariness and lack of oversight.•Banks in autocracies get lower intermediation margins than democracies, by some amount between -0.4 and -1.3 points.•In democracies, high levels of concentration in the credit markets are positively related to banks’ profits from intermediation, while the opposite happens in autocracies. The political determinants of banks' profitability are yet to be fully explored in the political economy of finance literature. This article brings politics to the theoretical discussion and the empirical analysis of bank interest margins, arguing that differences in political regimes are crucial in accounting for variations in banking profits across countries. The paper argues that we should expect lower margins from financial intermediation in autocracies than in democracies because of an inherent credibility problem and a lack of oversight in the former. Limited by state-owned banks or regulations favoring cronies, the room for financial elites to develop independent political power to threaten the government should be lower in autocracies than in democracies. I test this hypothesis with nonparametric (matching) and parametric analyses, where the former is used to estimate the latter to lower model dependence. The results consistently show that banks' interest margins in autocracies are lower by some amount between -0.4 and -1.3. This association is also confirmed indirectly when we analyze the impact of banking competition. The existence of big banks in democracies is positively related to banks' profits from intermediation, while the opposite is true for autocracies.