Corruption‐induced bank nonperforming loans

Abstract

AbstractBy introducing China's anticorruption movement, we establish the causal effect of corruption on nonperforming loans (NPLs). Through manual collection of all publicly available bank data and difference‐in‐differences (DID) regression analysis, the results show that the anticorruption movement significantly reduces NPLs, indicating that corruption leads to NPLs. In addition, the anticorruption movement is more effective in reducing NPLs for banks with higher risks, suggesting the existence of risk prevention mechanisms. Finally, our main conclusions are more pronounced in state‐owned commercial banks, banks located in regions with strong legal environment, and unlisted banks. Overall, this paper argues that corruption is also a factor leading to NPLs and provides solid empirical evidence for the anticorruption movement to reduce NPLs in China.