Political Environment, Banking Liquidity, and Banking Crises: A Mediation Analysis From Panel Data

ABSTRACT The objective of this paper is twofold. (i) First, we examine whether the political environment affect bank liquidity. (ii) Then, we investigate whether the political environment's impact on banking crises is mediated through bank liquidity. Utilizing a panel dataset comprising of more than 140 countries from 1984 to 2017, we find that prolonged tenures of executive leadership correspond to lower banking liquidity. This outcome is probably offset by the finding that countries governed by right‐wing or majority governments tend to exhibit higher levels of bank liquidity. Our analyzes using the Karlson‐Holm‐Breen (KHB) mediation method suggest that the political environment does influence directly banking crises. Tentative results suggest the indirect effect is mediated to some extent through banking liquidity and probably more through credit growth or interaction effects.