The Effect of Economic, Financial and Political Stabilities on the Banking Sector: Cases of Six Balkan Countries

Abstract

Today, banks, which act as financial intermediaries, ensure the growth of the economy. Banks, being a channel in monetary policies and monetary issues, are effective institutions in ensuring sustainable macroeconomic stability. In addition, banks are one of the institutions that are exposed to the most financial risk by nature. This article explores the long-term effects of economic, financial and political stabilities on the banking sector. This research covers the 21-year period between 1996–2017. The aim of this study is to examine the effects of economic, financial and political stabilities, which are the components of country risk, on the banking sector in selected Balkan countries and using the panel data analysis technique, which is one of the econometric analysis methods. Panel cross-sectional dependence, unit root tests, cointegration and causality tests were applied according to country risk indicators for the six selected Balkan countries. The selected Balkan countries have paid attention to their development in the country’s economies and their involvement in global trade and to adopt the modern banking system. In addition, six Balkan countries have been selected as examples in the study due to their close relations with Turkey in the socio-cultural and economic fields. The results of the panel tests indicated the of unit root tests as well as the existence of cointegration. The p values obtained as a result of cointegration analysis are less than 0.005, indicating the existence of cointegration. It has been concluded that there is a cointegration relationship in all three hypotheses, which have the effects of economic, financial and political stabilities on the banking sector. According to the Granger causality test results, there is a bidirectional causality relationship between the banking variable and the economic stabilities variable. Having long-term and causal relationships between selected Balkan economies requires financial and economic stability to be supported simultaneously. In short, it has been determined that economic, financial and political stabilities have a relationship with sustainable banking in the long term.