Causes of Inactivity in the European Banking Sector

Abstract

The crises of 2002 and 2008 have raised the issue of banking sector’s ability to absorb the effects of the crises. The inactivity of banks may be the result of a number of events, such as merger & acquisition (M&A), liquidation, default-bankruptcy, etc. Bankruptcy has been found to be a phenomenon that doesn’t happen often. On the contrary, M&As and liquidation are the main inactivity phenomena.The paper will address the issue of inactivity and will try to detect its causes using econometric models. Six groups of indicators are examined: performance, size, ownership, corporate governance, capital adequacy or capital structure and loan growth. Three econometric methods (Probit, Logit, OLS) have been used to create a system that predicts inactivity.The results of the econometric models show that from the six groups of indicators, four have been found to be statistically important (performance, size, ownership, corporate governance). Two have a negative impact (ownership, corporate governance) on the probability of inactivity and two positive (performance, size). This finding is consistent with the theory. The paper’s value and innovation is that it has given a systemic approach to find indicators of inactivity and it has excluded two groups of indicators as non-statistically important (capital adequacy or capital structure and growth).