Democracy and Banking Stability: Is the Relationship U-Shaped?

Abstract

This study addresses the impact of democracy on the stability of the banking system for a sample of 114 countries over the period 2000-2017. Our findings offer strong evidence for a U-shaped relationship between democracy and banking stability. Results also show that the way democratic institutions impact banking stability is highly dependent on their ability to implement effective anti-corruption policies. Controlling for countries' income levels reveals that not all high-income countries are necessarily enjoying the positive effects of democracy on banking stability. 2022, The Author(s).