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Corresponding Author:
Cândida Ferreira, Lisbon School of Economics and Management, Universidade de Lisboa and UECE – Research Unit in Complexity and Economics, Lisboa, Portugal

Financial Crisis, Banking Sector Performance and Economic Growth in the European Union

Volume 71 - Issue 3, August 2018
(pp. 257-288)
JEL classification: F30, F40, G20, G30, O40
Keywords: Bank Performance, Economic Growth, European Union, Financial Crisis, Panel Estimates

Abstract

This paper uses static and dynamic panel estimates in a sample including all 28 European Union countries during the last decade and provides empirical evidence on the important role that well-functioning EU banking institutions can play in promoting economic growth. The banking sector performance is proxied by the evolution of some relevant financial ratios and economic growth is represented by the annual Gross Domestic Product growth rate. In order to analyse the possible differences arising after the outbreak of the recent international financial crisis, the estimations consider two panels: one for the time period 1998-2012 and another for the subinterval 2007-2012. The results obtained allow us to confirm the importance of the variation of the different operational, capital, liquidity and assets quality financial ratios to economic growth. More precisely, we concluded that in the universe of the EU member states, for the interval including the years before and after the financial crisis (1998-2012), the variations of the Return on Average Assets, the Equity to Total Assets Ratio, the Debt to Equity Ratio, the Equity to Liabilities Ratio and the Net Loans to Total Deposits Ratio grew in line with the GDP growth rate; while the evolution of the Net Interest Margin, the Cost to Income Ratio and the Impaired Loans to Gross Loans Ratio was opposite to the GDP growth. However, considering only the years after the crisis (2007-2012), the variation of the Net Interest Margin was in line with the GDP while the variations of the Equity to Total Assets Ratio and the Equity to Liabilities Ratio contrast the GDP growth rate. These differences between the two considered time panels reflect the reactions of the European banking institutions to the recent financial crisis, as they, in general, adopted a less risky performance and decided to give particular emphasis to the traditional banking activities: receiving deposits and providing credit to finance the productive investment, in order to promote economic growth.

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Institute for International Economics of the Genoa Chamber of Commerce

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