The political economy of banks’ cash holdings

Purpose Our paper explores the political determinants of bank cash holdings. We selected as our sample banks from G7 (to proxy developed economies) and BRICS (to proxy emerging markets). Design/methodology/approach We collected data on banks' financial information from 2009 to 2019, totaling 5,438 banks. We employ regressions, two-staged least squares and matching to assess the impact of political determinants on bank cash holdings. Findings We find that banks in countries with higher corruption levels tend to accumulate more cash. Additionally, our paper shows that state-owned banks generally hoard more cash, except in election years, highlighting the political nature of these banks. We present further results regarding banks in G7 countries versus BRICS, the effects of the common law legal system, as well as the interplay between election years and unstable sources of funding. Originality/value Up to this point, no paper has analyzed the political determinants of banks' cash holdings. Our paper improves our current understanding on how legal systems, corruption levels, state ownership and elections play a role in bank cash holdings.