Benchmarking the Effects of Country Governance on the Profitability of Commercial Banks: A Cross-Country Investigation

This study aims to benchmark the effect of country governance on the profitability of commercial banks, overcoming the limited scope and context of past studies. This study uses unbalanced panel data from 126 countries, sourced from the World Bank, spanning the period from 2010 to 2021. The Pooled Ordinary Least Squares (OLS), Feasible Generalized Least Squares (FGLS), and two-step system Generalized Methods of Moments (GMM) estimation methods are used for the relationship analysis. Quantile regression is used for a robustness check. This study demonstrates that improvements in country governance significantly reduce the profitability of commercial banks. However, the negative effects are heterogeneous, where country governance indicators exert a greater negative impact on the upper quantiles of bank profitability compared to the lower quantiles. These findings have practical implications for formulating and implementing relevant rules, regulations, and financial policies to ensure greater competitiveness and financial efficiency in the banking sector. JEL classification: E5, E58, G1, G18