Political business cycle and bank liquidity creation in Ghana: the role of financial sector transparency

Abstract

This study examines how financial sector transparency (FST) achieved through credit information sharing helps reduce the BLC growth induced by PBC in an emerging economy in Africa. The study employs twenty-seven banks in Ghana over three (3) different political election cycles between 2006 and 2016. The results are estimated using robust random effect panel models with technological and year-effect controls. The results shows that (i) PBC increases liquidity creation by banks, (ii) FST administered through credit information sharing encourages BLC; (iii) the joint term of PBC and FST yields a negative synergetic effect on BLC and (iv) promoting FST dampens the growth in liquidity creation induced by PBC in Ghana. These results imply that bank managers, regulators and policymakers must be mindful of liquidity creation especially during election periods, since it can lead to soaring credit defaults and losses. Also, FST can be used as tool for suppressing growth in liquidity creation induced through PBC by helping banks screen out bad political dealings and politicians.