The Impact of Political Instability on Risk-Taking in the Banking Sector: International Evidence Using a Dynamic Panel Data Model (System-GMM)

This dissertation contributes to the existing literature by investigating the impact of political instability risk on risk-taking in the banking sector which is the first attempt for this nexus to the best of our knowledge. The use of country-specific data from 75 countries from 1996 to 2015 and the application of the Dynamic Panel Data Model (System-GMM) showed that political instability risk significantly increases risktaking in the banking sector. In addition, corruption levels and government ineffectiveness are the most important channels of political instability that affect the banking sector risk. The results also strongly support the "too big to fail" hypothesis. Finally, the robustness results confirm the conclusions derived from the baseline System-GMM model. Keywords: Political Instability, Risk, Banking, Corruption, System-GMM.