The contribution of bank intermediation to economic growth: Empirical evidence from CESEE countries

Abstract

The financial system is the crucial supporter of economic growth, as it is said to be the “blood” of economic activities. Many studies reveal the role and importance of the financial system in promoting economic development by raising growth through the accumulation and utilization of savings for productive investments (Levine, 2005). However, some studies highlight a negative or non-significant relationship which may differ depending on the sample of countries and the applied methodology, proxy of financial development, time period, etc. Based on the relevance of the topic and on the ongoing debate, the aim of this study is to explore the nexus and contribution of banking intermediation in the economic growth of some Central Eastern and South-Eastern European (CESEE) countries for the period 2010–2020. We use regression methods, ordinary least squares (OLS), and a fixed effect model to investigate the relationship between economic growth and bank intermediation. We measure the development of banking intermediation using banks’ credit to the private sector, credit to government and state-owned enterprises. The research results show that credits provided by banks do not affect economic growth and are in fact negatively related to economic growth, whereas the return on equity is positively related to economic growth.