This paper explores the impact of corruption on both the banking sector and economic growth; we determine the impact using 76 macroeconomic data from various countries over the period 2002– 2004. The results of various cross-sectional regressions provide substantial evidence that corruption significantly aggravates the problems with bad loans in the banking sector. In this study, we also find some evidence of a new channel through which corruption lowers economic growth: Corruption distorts the allo- cation of bank funds from normal projects to bad projects, which decreases the quality of private investments, hence it decreases economic growth.