Does Bank Stability Promote Economic Resilience?: Evidence From Panel Data

Abstract

Banking stability continues to receive heightened attention since the Global Financial Crisis, circa 2008. Much of this attention has been focused on the prevention of future systemic crises. Notwithstanding the importance of these preventative efforts, it is important to understand the effectiveness of banking sector stability as a buffer to the real economy, when crises do occur. That is, does banking stability promote economic resilience to crises? Also important is the effect that stability has on economic growth, given the resources being diverted to banking regulation. This work investigates both of these concerns, using a global panel dataset for the period 1995-2015. A dynamic panel model is employed within a system GMM estimation framework, and preliminary results indicate that there are important trade-offs to consider between driving finance induced economic growth, and maintaining banking stability. Despite these trade-offs, the results point to the banking z-score as a tool that both promotes long-run growth, and resilience. The banking z-score has a positive effect on economic growth, and also attenuates the impact of banking crises.

Keywords: Economic Resilience; Banking Stability; Generalized Method of Moments

JEL Classification: G01; O16