Financial innovation and bank growth: The role of institutional environments

This research evaluates the impact of financial innovation on bank growth and how their growth is affected by various dimensions of institutional environments’ interaction with financial innovation. To address these relationships, we use different measures of financial innovation and bank growth from a panel dataset of 40 countries (OECD and non-OECD) over a sample period spanning from 1989 to 2011. There are three main findings herein. First, banks located in countries with a higher level of financial innovation exhibit better growth in assets, loans, and profits. This positive linkage remains highly significant in the subsample without considering the 2007–2008 global financial crisis. Second, bank regulations, financial reforms, and country governance indicators tend to weaken the relationship between financial innovation and bank growth. Third, globalization leans toward strengthening this relationship.