Financial stability of the banking sector in European countries: A comparative analysis

Larysa Sysoyeva

doi:10.2298/pan170601021s

Abstract

The outburst of the financial crisis in 2008 raised a number of questions about financial stability and banking development, given that the crisis originated in advanced economies, where the financial sector had grown both very large and very complex. This study presents the results of research into ways of ensuring financial stability in the banking sectors in European and EU associated countries. The empirical analysis for EU member and associate countries is carried out for the period 2004-2014 and shows that significant heterogeneity in the member states? descriptions of their banking sectors not only led to different levels of Z-score, but also to principally different factors influencing the stability of banking activities in EU countries and countries associated with the EU.

Highlights

Ensuring sustainable and steady development of the banking sector depends on its stability, i.e. ability to perform its functions under the influence of internal and external destructive factors
This paper investigated the drivers of financial stability in the banking sector in EU countries and EU associated members
The solidity of the banking sector in EU associated members are obviously lower than levels featured by EU-13, and much lower than in the EU-15

Summary

Literature Review

In the theoretical discussion on determining the economic category of “financial stability”, two basic approaches can be identified. Demirgüç-Kunt, and Levine (2019) examined the NPL impact on the probability of a systemic crisis in the banking sector using data on 69 countries over the period of 1980-1997 years. For the aims of the present analysis, the main issue of using this estimator is related to the specific nature of Z-score persistency: the cross-sectional variation embodies a large part of the information since within-country Z-score level is quite persistent In this respect, the first-difference GMM estimator allows controlling for possible measurement errors, country-specific heterogeneity, and endogeneity bias, it does not exploit the variation in levels, which is predominant. The validity of the additional moment conditions associated with the level equation can be tested with the difference Sargan/Hansen test

Preliminary and Descriptive Evidence

Results

Concluding Remarks