Banking sector stability and economic growth in post‐transition European Union countries

• Author: Marius Dan Gavriletea,Djula Borozan,Yilmaz Bayar
• Published date: 01 January 2021
• Date: 01 January 2021
• DOI: http://doi.org/10.1002/ijfe.1829

RESEARCH ARTICLE

Banking sector stability and economic growth

in post-transition European Union countries

Yilmaz Bayar

1

| Djula Borozan

2

| Marius Dan Gavriletea

3

1

Department of Economics, Faculty of

Economics and Administrative Sciences,

Usak University, Usak, Turkey

2

Faculty of Economics in Osijek, Josip

Juraj Strossmayer University of Osijek,

Osijek, Croatia

3

Business Department, Faculty of

Business, Babes-Bolyai University, Cluj-

Napoca, Romania

Correspondence

Marius Dan Gavriletea, Business

Department, Faculty of Business, Babes-

Bolyai University, Str. Horea 7, Cluj-

Napoca, Romania.

Email: dan.gavriletea@tbs.ubbcluj.ro

Abstract

Economic growth is considered to be an essential means for poverty alleviation

and improving countries' well-being. Disturbances and instability in the bank-

ing sector may jeopardize financial stability and generate adverse, considerable

and long-lasting consequences therefor. This study analyzed the dynamic and

causal effects of various indicators of banking sector stability on economic

growth by employing new generation panel cointegration and causality tests in

post-transition European Union countries over the period 1998–2016. Taking

into account cross-sectional dependence between countries, the presence of

heterogeneity in the errors, endogeneity and structural breaks, the long and

short run analyses revealed the cointegration relation between the variables,

the statistically significant positive effect of banking sector stability on eco-

nomic growth and the efficiency of the error correction mechanism. The cau-

sality analysis disclosed the opposite causality direction between the particular

banking sector stability indicators and economic growth, suggesting that bank-

ing sector stability is a complex, hierarchically structured multidimensional

construct. Its different dimensions require different policy responses aiming at

preventing future shocks and mitigating the adverse effects, while encouraging

economic growth.

KEYWORDS

Banking sector stability, economic growth, panel cointegration and causality analysis, post-

transition EU countries, structural breaks

1|INTRODUCTION

The banking sector plays an important role in an econ-

omy. Hence, disturbances and instability in its operation

jeopardize financial stability and may have considerable

and long-lasting macroeconomic consequences (Mishkin,

2000). Their adverse consequences may be, for example, a

reduced power of monetary policy and deteriorated price

stability or an inefficient resource allocation through a

bad banking credit system and thus flaws in financing

investment and consumption. Aghion, Angeletos, Ban-

erjee, and Manova (2010) implicitly corroborated that

banking sector stability leads to economic stability

which is necessary for sustainable economic growth and

development. Consequently, central banks, supervisory

authorities and broader macroeconomic policy authori-

ties are particularly interested in assessing and monitor-

ing banking sector stability that may be defined as the

state in which the banking system is resistant to eco-

nomic shocks and ab le to meet its basic fu nctions.

A development of the banking sector across countries

differs based on multiple determinants such as macroeco-

nomic stability (Agenor & da Silva, 2012), human capital

(Perera, 2017), political stability and investor protection

Received: 15 March 2019 Revised: 4 October 2019 Accepted: 18 June 2020

DOI: 10.1002/ijfe.1829

Int J Fin Econ. 2021;26:949–961. wileyonlinelibrary.com/journal/ijfe © 2020 John Wiley & Sons, Ltd. 949