Assessing financial stability in Southeast Europe (SEE): An econometric perspective

Abstract

In the last decade, the global financial landscape, including Southeast Europe's eleven diverse economies, has been significantly impacted by multiple financial crises. These crises have led to economic downturns, unemployment spikes, and unstable financial structures. This study investigates financial stability and risks in Southeast Europe from 2012 to 2021, focusing on Albania, Bosnia and Herzegovina, Bulgaria, Cyprus, Montenegro, Greece, Croatia, North Macedonia, Kosovo, Serbia, and Turkey. It aims to identify factors influencing financial stability amid distinct economic challenges posed by global crises. Utilizing the Financial Stability Index (FSI) as the dependent variable, alongside the Banking Stability Index (BSI), inflation rate, GDP, and public debt as independent variables, the research employs data from the World Bank and The Global Economy. Analysis through STATA software and methods like OLS, OLSR, FE, RE, and GMM reveals the critical role of banking in financial stability, with a robust BSI positively impacting it, while inflation poses additional risks. The study advises Southeast European policymakers to prioritize banking stability and economic growth to enhance financial stability, while also managing inflation and public debt to reduce future financial risks. Our findings suggest that a one-unit increase in the BSI is associated with a 3.35-unit increase in the FSI, highlighting the banking sectors significant influence on regional financial stability. High public debt levels, conversely, are found to correspond with reduced financial stability, with a strong negative correlation of -0.634 between FSI and public debt. These findings underscore the importance of robust banking systems and sound fiscal policies in maintaining financial stability in the face of economic adversities.