Abstract
The study analyses the impact of country’s governance factors on the financial behaviour and performance of financial intermediaries operating in European Union countries, by covering the period 2000–2017. Empirical evidence provided by the paper relies on a set of financial and political factors that has not been previously studied. Four indicators are jointly used as proxies for capturing the various dimensions of a country’s good governance, while 21 financial indicators represent the alternative dependent variables meant to comprehensively depict the banking sector and capital market development. Each panel regression has been controlled for country’s degree of economic development and its membership to OECD and euro-zone. The findings indicated that various dimensions of political factor caused different effects on financial sector features. Control of corruption, solid political and economic stability determine significant effects on most financial variables considered (almost two-thirds of the financial indicators considered). Even after controlling for the lagged effect of governance factors the main results hold, in that monitoring corruption, maintaining political stability and designing sound economic policies still have an impact on most financial indicators considered. Another interesting conclusion supported by the results is that not all political instability indicators are detrimental for banking and stock market functioning.
Highlights
Financial systems are evolving at the confluence of complex and heterogeneous political, social and economic factors
Several strands of research investigating the impact exerted by political instability, regulatory features and corruption over the financial system have emerged over time
The statistical analysis performed by the author exhibited high granularity, as he relied on the monthly changes in the economic policy uncertainty indicator
Summary
Financial systems are evolving at the confluence of complex and heterogeneous political, social and economic factors. Witnessing various approaches, emphasizes a common denominator: a country’s political stability, regulatory quality and level of corruption are determining in a considerable extent the performance and degree of development of a financial system Paper’s aim is to assess whether various dimensions of governance, represented by political instability, regulatory quality, control of corruption, and economic policy uncertainty may trigger effects on the further development and evolutions in the banking and stock market. The analysis significantly differentiates from previous research as it jointly considers several complementary measures of country’s governance in order to acquire an in-depth picture of the relationship established with the financial sector This empirical approach emphasizes these linkages from multiple standpoints, such as banking system access, stability, efficiency and depth and respectively stock market development.
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