Financial sector transparency and bank interest margins: do quality of political and financial regulatory institutions matter?

Abstract

Purpose

This study aims to examine the effect of private (PRST) and public (PUST) sector-led financial sector transparencies on bank interest margins (BIM) termed as social cost of financial intermediation in different institutional quality setups.

Design/methodology/approach

This study uses a two-step dynamic generalized method of moments panel data and bootstrapped quantile models with 91 economies between 2004 and 2016. Data is sourced from World Development Indicator and Global Development Finance databases.

Findings

The results show that under strong and weak political and financial regulatory institutional setups, the reducing effect of PRST on BIM are observed and reported while the full sample reports no significant nexus between PRST and PUST on BIM. Furthermore, under political institutional quality sample, economies with strong corruption control and regulatory quality are able to reinforce the dampening effect of PRST on BIM while under the same political institutional quality sample, economies with weak rule of law are able to heighten the reducing effect of PRST on BIM. Moreover, under financial regulator institutional quality sample, economies with strong overall weighted and unweighted, chief executive officer and policy dependent central banks are able to intensify the diminishing effect of PRST on BIM while under the same financial regulator institutional quality sample, economies with weak limits on lending are able to amplify the reducing effect of PRST on BIM. However, PUST is reported to propel lower levels BIM in the bootstrap models, especially in strong institutional economies.

Practical implications

These findings imply that policymakers may rely on PRST to reduce BIM, especially under financial regulatory institutional quality. Additionally, economies must be careful on their reliance on PRST because the effectiveness of PRST to tame high BIM is dependent on the strength of political and financial regulatory institutions.

Originality/value

To the best of the authors’ knowledge, this study presents first time international evidence on the effect of private and public sector-led financial transparency on BIM in strong and weak political and financial regulatory institution economies.

Citation

Kusi, B.A. (2021), "Financial sector transparency and bank interest margins: do quality of political and financial regulatory institutions matter?", Journal of Financial Regulation and Compliance, Vol. 29 No. 4, pp. 409-433. https://doi.org/10.1108/JFRC-10-2020-0097