Bank Competition, Financial Stability, and Economic Growth Links: A Micro and Macro Level Study of Selected Asian and European Economies


This study investigates the impact of bank competition and fi nancial stability on economic growth in Asian and European economies using the bank level and country-level panel data over 2001 to 2017. It employs a fi xed-effect estimator, as well as a system generalized method of moment (GMM) estimator to control unobserved heterogeneity, endogeneity, the dynamic effect of economic growth and bank stability, and reverse causality in its estimation.

In bank-level analysis, this study uses the panel data of fourteen emerging Asian and European countries and investigates the impact of bank competition, bank size, and regulations on the nancial stability of emerging Asian and European economies. It also investigates the non-linear relationship of bank competition and size of bank on nancial stability of the banking system. The results of this analysis show that bank competition negatively a ects the nancial stability of banks and non-linear relationship is not observed. However, bank size a ects the stability of the banks in a non-linear way. Regulatory factors are also identi ed which are important for the stability of banks in emerging economies.

In country-level analysis, this study investigates the effect of bank competition and fi nancial stability on economic growth by examining panel-data from thirty-eight European and thirty-three Asian countries over 2001 to 2017. Bank competition is measured with the Boone indicator, and bank stability with Z-scores and nonperforming loan ratio, at the country level. Results show that bank stability signifi cantly contributes to economic growth in Asia and Europe with different effect size. Economic growth falls during crisis periods (both the global fi nancial crisis and the local banking crisis), highlighting the importance of a resilient banking system during crisis periods. Moreover, empirical outcomes show that lower banking competition supports economic growth and increases nancial stability. This study provides a framework for banks and regulators to boost economic growth through the channel of banking stability.

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