Business cycle and bank performance in developing and emerging economies: Does institutional quality matter?

Purpose This study examines the relationship between the business cycle and bank performance, measured by profitability, income efficiency and cost efficiency, in emerging and developing markets. It also investigates the moderating role of institutional quality in the business cycle–bank performance relationship. Design/methodology/approach Using multi-country aggregate data for 118 developing and emerging economies over the period 2000–2021, the relationships between business cycles, institutional quality, and bank performance, measured by income efficiency (NIM and NII), cost efficiency and profitability indicators (ROA and ROE). Findings The results show that bank performance is procyclical on average: more favourable business-cycle conditions are associated with higher NIM, NII, ROA and ROE, alongside lower operating-cost burdens. Institutional quality is positively associated with bank performance and strengthens the positive association between business-cycle conditions and bank performance, while also being linked to better cost efficiency. These findings are robust to alternative specifications and proxies, with notable heterogeneity across income groups. Originality/value This study provides novel multi-country evidence on the moderating role of institutional quality in the business cycle–bank performance nexus in developing and emerging economies. By highlighting income-level heterogeneity, it offers new insights into the role of governance and enforcement in banks' cyclical performance dynamics.