Abstract
This study focuses on the role of financial development in the economic growth of Central, Eastern and South-Eastern European (CESEE) countries in the post-communist era (1995–2014), which coincides with the opening up of financial markets to foreign investors and the global financial crisis. We investigate whether economic growth in CESEE countries has benefited from the presence of foreign-owned banks. To this end, we introduce some refined measures of financial development and control for banks’ financial strength. Our results challenge the idea that bank credit fosters economic growth and that foreign-owned banks are indisputably a positive addition to local markets able to foster economic growth.
Highlights
This study focuses on the role of financial development in economic growth in Central, Eastern and South-Eastern European (CESEE) countries from the beginning of the post-communist era up to the period of the global financial crisis (GFC) and afterwards (1995–2014)
The first column of each table reports the results from a model that considers the traditional variables of financial development, while columns three and four highlight the estimation results including our new measures of financial development
As far as the role of foreign banks is concerned, we found that the market share of foreign banks in local credit markets is negatively associated with economic growth, though not significantly so
Summary
This study focuses on the role of financial development in economic growth in Central, Eastern and South-Eastern European (CESEE) countries from the beginning of the post-communist era up to the period of the global financial crisis (GFC) and afterwards (1995–2014).At the beginning of the economic and political transformations that took place in post-communist countries, there was a huge gap in the level of economic and financial development between this group of countries and advanced economies. This study focuses on the role of financial development in economic growth in Central, Eastern and South-Eastern European (CESEE) countries from the beginning of the post-communist era up to the period of the global financial crisis (GFC) and afterwards (1995–2014). According to [1], this partly reflected waves of reforms, including the opening up of Eastern Europe and other transition economies, as well as rapid financial globalisation before the GFC. This trend peaked in 2007 and slowed markedly after the outbreak of the crisis. The share of foreign-owned banks in banking sector assets in CESEE countries (see Table 1) ranges from 19% in Kosovo to 95% in Estonia. The stake of foreign-owned banks is below 50% in only five out of twenty countries (Kosovo, Ukraine, Belarus, Slovenia and Hungary)
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