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The impact of central bank independence and transparency on banks' non-performing loans and economic stability

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Abstract

The global financial crisis of the past decade had a detrimental impact on banking institutions worldwide. In both developed and developing countries, it is widely documented that the proportion of non-performing loans is often linked to bank collapse and financial crises. Existing studies show that central bank independence and transparency are important for a country's financial stability and institutional quality. Building on this premise, we investigate whether central bank independence and transparency affect the occurrence of non-performing loans. Using panel data from 39 countries, we find that central banks free from political interference reduce non-performing loans. Similarly, transparent central banks with a lower degree of information symmetry reduce the prevalence of non-performing loans. Thus, our findings support that independent and transparent central banks minimize the incidence of non-performing loans. The results imply that independent central banks indirectly impact bank operational outcomes. Our results are robust to a battery of tests and specifications.

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Authors and Affiliations

  1. Leeds Business School, Leeds Becket University, Leeds, LS1 3HB, UK

    Abdullah Mamoon

  2. Department of Accounting and Finance, De Montfort University, Leicester, LE1 9BH, UK

    Frank Kwabi & Wansu Hu

  3. Edinburgh Business School, Heriot-Watt University, Edinburg, EH14 4AS, UK

    Ernest Ezeani

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Mamoon, A., Kwabi, F., Ezeani, E. et al. The impact of central bank independence and transparency on banks' non-performing loans and economic stability. J Bank Regul (2024). https://doi.org/10.1057/s41261-024-00237-y

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