Abstract
Banking competition plays an important role in the efficient functioning of a financial market and its regulation has become one of the key objectives of the financial policy. In this paper, using a panel vector error-correction model (VECM), we study the interactions between banking competition, banking stability, and economic growth in a panel of 32 European countries over 1996–2014. We focus on the direction of Granger causality between the variables. Our empirical results show that both banking competition and banking stability are significant long-term drivers of economic growth in the European countries. This study holds important policy implications- economic policies should recognize the differences in the relationship between both banking competition and banking stability in order to maintain sustainable economic performance of these countries.
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