Financial Inclusion and Bank Stability: Evidence from Europe

Abstract

The Great Recession of 2007-2009 piqued the interest of policymakers worldwide, prompting various initiatives to stabilize the financial system and advance financial inclusion. However, few studies have considered their interconnectedness or whether any synergies or trade-offs exist between them. This paper investigates how financial inclusion affects the stability of the European banking system. The findings indicate that advancements in financial inclusion through more account ownership and digital payments have a stabilizing effect on the banking industry. A deeper investigation shows that such a stabilizing impact is mainly driven by the targeting of disadvantaged adults who are young, undereducated, unemployed, and who live in rural areas. Hence, along with its known benefits to society as a whole, financial inclusion has the additional benefit of improving the stability of the financial system. Such findings call for policy configurations that are specifically designed to achieve financial inclusion for disadvantaged individuals.