Benchmarking the effects of country governance on the profitability of commercial banks: a cross-country investigation

The objective of this study is to benchmark the effect of country governance, specifically the six indicators of control of corruption, government effectiveness, regulatory quality, rule of law, political stability, and voice and accountability, on the profitability of commercial banks, while overcoming the limited scope and context of past studies. This study uses unbalanced panel data on 126 countries, sourced from the World Bank, spanning 2010 to 2021. Pooled Ordinary Least Squares (OLS), Feasible Generalized Least Squares (FGLS), and two-step system Generalized Methods of Moments (GMM) are used, and quantile regression is used for a robustness check. The main findings show that all indicators of country governance significantly reduce bank profitability. Nevertheless, under quantile regression, the negative impacts are heterogeneous and substantially stronger for banks in the higher profitability quantiles than in the lower quantiles. This finding contributes theoretically to the Resource Dependence Theory by revealing that the effect of each country governance indicator on the profitability of commercial banks varies in heterogeneous ways across various performance levels. Furthermore, on the practical side, it provides regulators with evidence that governance reforms promote long-term stability despite reducing short-term profits, while guiding bank managers to enhance operational efficiency and develop adaptive strategies to navigate increasingly regulated environments and ensure sustainability.