The effect of democracy and economic freedoms on bank performance: An empirical approach to developed and developing countries

In addition to regulating social relations, the institutional structure of countries is thought to determine banking performance by taking place in the background of macro variables. In recent years, the opinion that the effect of the institutional structure cannot be ignored has been prevalent in the studies in the field of economy. For this reason, the study aimed to determine the effects of democracy and economic freedoms, which are the basic components of the corporate structure, on banking performance. In the study investigating the effects of democracy and economic freedoms on bank performance, the data of the banking sector covering the years 2005-2017 of developed and developing countries were used. It was concluded that the results obtained from the analysis using the panel data set and dynamic model and the system GMM estimator are consistent. In the study, separate analyzes were made for 36 developed, 46 developing and 82 countries in total. Another important feature is analyzing banking performance in terms of profitability and cost efficiency. As a result of the study, the increase in the level of democracy increases active profitability and decreases the net interest margin by negatively affecting it. The increase in the level of economic freedom increases the return on equity at a high rate. While democracy increases cost efficiency, economic freedom decreases. While democracy increases profitability in developed countries, it decreases cost efficiency. In developing countries, economic freedom increases profitability, but leads to cost inefficiency.