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Regulatory and Institutional Determinants of Credit Risk Taking and a Bank's Default in Emerging Market Economies

A Two-Step Approach

Christophe J. Godlewski is at the Institut d'Etudes Politiques, 47 avenue de la Forêt Noire, 67082 Strasbourg Cedex, France. E-mail: christophe.godlewski{at}urs.u-strasbg.fr

Regulatory and institutional environment is not without effect on a bank's risk taking and therefore on a bank's default. In this article, we investigate regulatory and institutional determinants of credit risk taking and bank's default probability in emerging market economies. Using a two step logit model applied to a database of banks from emerging economies, we confirm the role of the institutional and regulatory environment as a source of excess credit risk, which increases a bank's default risk. In particular, the rule of law appears to be a crucial element of an efficient regulatory environment, which may reduce excessive risk taking incentives.

Key Words: JEL Classification: C35 • JEL Classification: G21 • JEL Classification: G28 • Regulatory and institutional determinants • bank's default • credit risk • emerging market economies • two step logit model

Journal of Emerging Market Finance, Vol. 5, No. 2, 183-206 (2006)
DOI: 10.1177/097265270600500204


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