Corruption, soundness of the banking sector, and economic growth: A cross-country study

This paper explores the impact of corruption on both the banking sector and economic growth; we determine the impact using 76 macroeconomic data from various countries over the period 2002-2004. The results of various cross-sectional regressions provide substantial evidence that corruption significantly aggravates the problems with bad loans in the banking sector. In this study, we also find some evidence of a new channel through which corruption lowers economic growth: Corruption distorts the allocation of bank funds from normal projects to bad projects, which decreases the quality of private investments, hence it decreases economic growth. (C) 2011 Elsevier Ltd. All rights reserved.