Does the Shadow Economy Cast a Cloud on Banking Sector Resilience?
Cooray, Arusha, Özmen, Ibrahim, and Schneider, Friedrich (2025) Does the Shadow Economy Cast a Cloud on Banking Sector Resilience? Scottish Journal of Political Economy, 72 (4). e70000.
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Abstract
Employing 127 countries over the 1991–2017 period, we investigate whether the shadow economy affects banking sector resilience, as measured by bank non-performing loans, bank capital to total assets, and bank regulatory capital to risk-weighted assets. Using several different methodologies including System GMM, IV estimation, the High Dimensional Fixed Effects (HDFE) estimator, and Least Squares Dummy Variable (LSDV) estimation, we find that the shadow economy significantly negatively affects banking sector resilience. The Juodis et al. (2021) Granger non-causality tests further reveal a bi-directional causality between the shadow economy and bank non-performing loans and bank capital to total assets.
| Item ID: | 87803 |
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| Item Type: | Article (Research - C1) |
| ISSN: | 1467-9485 |
| Keywords: | bank capital, banking sector resilience, non-performing loans, shadow economy |
| Copyright Information: | © 2025 The Author(s). Scottish Journal of Political Economy published by John Wiley & Sons Ltd on behalf of Scottish Economic Society. This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made. |
| Date Deposited: | 23 Feb 2026 06:48 |
| FoR Codes: | 35 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 3502 Banking, finance and investment > 350204 Financial institutions (incl. banking) @ 100% |
| SEO Codes: | 11 COMMERCIAL SERVICES AND TOURISM > 1102 Financial services > 110201 Finance services @ 100% |
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