Financial system performance in European Union countries: do country’s governance indicators matter?
Abstract
The study analyses the impact of country’s governance factors on the financial behaviour and performance of financial intermediaries operating in European Union countries, by covering the period 2000–2017. Empirical evidence provided by the paper relies on a set of financial and political factors that has not been previously studied. Four indicators are jointly used as proxies for capturing the various dimensions of a country’s good governance, while 21 financial indicators represent the alternative dependent variables meant to comprehensively depict the banking sector and capital market development. Each panel regression has been controlled for country’s degree of economic development and its membership to OECD and euro-zone. The findings indicated that various dimensions of political factor caused different effects on financial sector features. Control of corruption, solid political and economic stability determine significant effects on most financial variables considered (almost two-thirds of the financial indicators considered). Even after controlling for the lagged effect of governance factors the main results hold, in that monitoring corruption, maintaining political stability and designing sound economic policies still have an impact on most financial indicators considered. Another interesting conclusion supported by the results is that not all political instability indicators are detrimental for banking and stock market functioning.
Keyword : banking system, stock market, governance indicators, regulatory quality, political instability, economic policy uncertainty, state fragility, corruption, panel regression
How to Cite
Barbu, T. C. ., & Boitan , I. A. (2020). Financial system performance in European Union countries: do country’s governance indicators matter?. Journal of Business Economics and Management, 21(6), 1646-1664. https://doi.org/10.3846/jbem.2020.13633
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Pina, V., Torres, L., & Bachiller, P. (2016). Political influence and the performance of Nonprofit Spanish Banks. Nonprofit Management and Leadership Journal, 26(4), 471–488. https://doi.org/10.1002/nml.21205
Rezgallah, H., Ozatac, N., & Katircioglu, S. (2019). The impact of political instability on risk‐taking in the banking sector: International evidence using a dynamic panel data model (System‐GMM). Managerial and Decision Economics, 40(8), 891–906. https://doi.org/10.1002/mde.3075
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Smales, A. (2015). Better the devil you know: The influence of political incumbency on Australian financial market uncertainty. Research in International Business and Finance, 33(1), 59–74. https://doi.org/10.1016/j.ribaf.2014.06.002
Shen, Ch.-H., & Lin, Ch.-Y. (2012). Why government banks underperform: A political interference view. Journal of Financial Intermediation, 21(2), 181–202. https://doi.org/10.1016/j.jfi.2011.06.003
Sum, V. (2014). Can firms with the best training program withstand the storm of economic policy uncertainty? Journal of Business Economics and Management, 16(1), 206–213. https://doi.org/10.3846/16111699.2012.761647
Toraman, C., & Tuncay, M. (2017). Effect of the political risk on capital asset valuation in financial markets: The case of Turkey. Business and Economics Research Journal, 8(3), 413–432. https://doi.org/10.20409/berj.2017.58
Vasconcelos, A. M. (2018). Why political risk matters for banking flows? In Proceedings of the 40 International Academic Conference, Stockholm. International Institute of Social and Economic Sciences. https://doi.org/10.20472/IAC.2018.040.066
Witkowska, D., Kompa, K., & Mentel, G. (2019). The effect of government decisions on the efficiency of the investment funds market in Poland. Journal of Business Economics and Management, 20(3), 573–594. https://doi.org/10.3846/jbem.2019.9861
Wooldridge, J. (2003). Introductory econometrics – a modern approach (2nd ed.). South-Western Publishing Co.
Agarwal, V., Aslan, H., Huang, L., & Ren, H. (2018). Policy uncertainty and household stock market participation (Working Paper). Georgia State University. https://doi.org/10.2139/ssrn.3223597
Ahmed, W. M. A. (2020). Corruption and equity market performance: International comparative evidence. Pacific-Basin Finance Journal, 60, 101282. https://doi.org/10.1016/j.pacfin.2020.101282
Aisen, A., & Veiga, F. J. (2011). How does political instability affect economic growth (IMF Working Paper, 2011/12). International Monetary Fund. https://www.imf.org/en/Publications/WP/Issues/2016/12/31/How-Does-Political-Instability-Affect-Economic-Growth-24570
Asongu, A. S. (2012). Government quality determinants of stock market performance in African countries. https://mpra.ub.uni-muenchen.de/39631/1/Government_Quality_Determinants_of_Stock_Market_Performance_in_African_Countries.pdf
Asteriou, D., & Sarantidis, A. (2016). Political instability and stock market returns: Evidence from OECD countries. Economics and Business Letters, 5(4), 113–124. https://doi.org/10.17811/ebl.5.4.2016.113-124
Asteriou, D., Pilbeam, K., & Tomuleasa, I. (2016). The impact of economic freedom, business regulation and corruption on bank profitability and bank stability: Evidence from Europe. http://openaccess.city.ac.uk/16839/1/FreedomRegulationCorruption.pdf
Ayaydın, H., & Baltacı, N. (2013). Corruption, banking sector, and stock market development: A panel data analysis. European Journal of Research on Education (Special Issue: Human Resource Management), 94–99.
Berger, A. N., Guedhami, O., Kim, H. H., & Li, X. (2018). Economic policy uncertainty and bank liquidity hoarding (Working Paper). SSRN. https://doi.org/10.2139/ssrn.3030489
Boadi, I., & Amegbe, H. (2017). The link between quality of governance and stock market performance: International level evidence. European Journal of Government and Economics, 6(1), 78–101. https://doi.org/10.17979/ejge.2017.6.1.4324
Bolarinwa, S., & Soetan, F. (2019). The effect of corruption on bank profitability. Journal of Financial Crime, 26(3), 753–773. https://doi.org/10.1108/JFC-09-2018-0102
Bordo, M. D., Duca, J. V., & Koch, C. (2016). Economic policy uncertainty and the credit channel: Aggregate and bank level U.S. evidence over several decades. Journal of Financial Stability, 26, 90–106. https://doi.org/10.1016/j.jfs.2016.07.002
Brogaard, J., Dai, L., Ngo, P. T. H., & Zhang, B. (2020). Global political uncertainty and asset prices. The Review of Financial Studies, 33(4), 1737–1780. https://doi.org/10.1093/rfs/hhz087
Chinoda, T., & Kwenda, F. (2019). The impact of institutional quality and governance on financial inclusion in Africa: A two-step system generalised method of moments approach. Journal of Economic and Financial Sciences, 12(1), a441. https://doi.org/10.4102/jef.v12i1.441
Dai, L., & Zhang, B. (2019). Political uncertainty and finance: A survey. Asia-Pacific Journal of Financial Studies, 48(3), 307–333. https://doi.org/10.1111/ajfs.12257
Epstein, R., & Rhodes, M. (2018). Good and bad banking on Europe’s periphery: Pathways to catching up and falling behind (KFG Working Paper Series no. 83).
European Central Bank. (2016). Financial Stability Review. May 2016. https://www.ecb.europa.eu/pub/pdf/fsr/financialstabilityreview201605.en.pdf
European Commission. (2020). Financial services policy. https://ec.europa.eu/info/business-economyeuro/banking-and-finance/financial-reforms-and-their-progress/financial-services-policy_en
Fayman, A., He, L. T., & Casey, K. M. (2018). Politics in banking: does political party control impact bank risk and return? Managerial Finance, 44(2), 178–188. https://doi.org/10.1108/MF-07-2017-0268
Fhima, F. (2018). Corruption, banking stability and economic growth in the MENA region. In Proceedings of the 39 International Academic Conference, Amsterdam. International Institute of Social and Economic Sciences. https://doi.org/10.20472/IAC.2018.039.014
Gee, C. S., & Abd Karim, M. Z. (2016). Financial market regulation, country governance, and bank efficiency: Evidence from East Asian countries. Contemporary Economics, 10(1), 39–54. https://doi.org/10.5709/ce.1897-9254.197
Hartwell, C. A. (2018). The effect of political volatility on capital markets in EU accession and neighborhood countries. Journal of Economic Policy Reform, 21(4), 260–280. https://doi.org/10.1080/17487870.2017.1311793
Ijaz, S., Hassan, A., Tarazi, A., & Fraz, A. (2020). Linking bank competition, financial stability, and economic growth. Journal of Business Economics and Management, 21(1), 200–221. https://doi.org/10.3846/jbem.2020.11761
Jackowicz, K., Kowalewski, O., & Kozłowski, Ł. (2013). The influence of political factors on commercial banks in Central European countries. Journal of Financial Stability, 9(4), 759–777. https://doi.org/10.1016/j.jfs.2012.08.001
Kapolková, J., & Tolstova, E. (2015). The impact of political risk on equity market performance. Lund University, School of Economics and Management. https://pdfs.semanticscholar.org/6c02/2b3cd6a1281460f882b2a6722277fc96fcf0.pdf
Kaufmann, D. (2010). Can corruption adversely affect public finances in industrialized countries? https://www.brookings.edu/opinions/can-corruption-adversely-affect-public-finances-in-industrializedcountries/
Koetter, M., & Popov, A. (2018). Politics, banks, and sub-sovereign debt: Unholy trinity or divine coincidence? (ECB Working Papers Series No 2146). European Central Bank.
Kosi, T., & Bojnec, Š. (2013). Institutional barriers to business entry in advanced economies. Journal of Business Economics and Management, 14(2), 317–329. https://doi.org/10.3846/16111699.2011.633348
Lakštutienė, A., Krušinskas, R., & Rumšaitė, D. (2011). The influence of deposits insurance on the stability of the Baltic States banking system. Journal of Business Economics and Management, 12(3), 482–502. https://doi.org/10.3846/16111699.2011.599413
Mamatzakis, E., Kalyvas, A., & Piesse, J. (2013). Regulations, economic freedom and bank performance: Evidence from the EU-10 economies (MPRA Paper No. 51878). https://mpra.ub.uni-muenchen.de/51878/1/MPRA_paper_51878.pdf
McFarlane, J. (2000). Corruption and the financial sector: The strategic impact. Penn State International Law Review, 19(1), Article 3. http://elibrary.law.psu.edu/psilr/vol19/iss1/3
Ng, J., Saffar, W., & Zhang, J. J. (2020). Policy uncertainty and loan loss provisions in the banking industry. Review of Accounting Studies, 25, 726–777. https://doi.org/10.1007/s11142-019-09530-y
Park, J. (2012). Corruption, soundness of the banking sector, and economic growth: A cross-country study. Journal of International Money and Finance, 31(5), 907–929. https://doi.org/10.1016/j.jimonfin.2011.07.007
Pina, V., Torres, L., & Bachiller, P. (2016). Political influence and the performance of Nonprofit Spanish Banks. Nonprofit Management and Leadership Journal, 26(4), 471–488. https://doi.org/10.1002/nml.21205
Rezgallah, H., Ozatac, N., & Katircioglu, S. (2019). The impact of political instability on risk‐taking in the banking sector: International evidence using a dynamic panel data model (System‐GMM). Managerial and Decision Economics, 40(8), 891–906. https://doi.org/10.1002/mde.3075
Roberts, M. R., & Whited, T. (2012). Endogeneity in empirical corporate finance (Simon School Working Paper No. FR 11-29). SSRN. https://doi.org/10.2139/ssrn.1748604
Roe, J. M., & Siegel, I. J. (2011). Political instability: Effects on financial development, roots in the severity of economic inequality. Journal of Comparative Economics, 39(3), 279–309. https://doi.org/10.1016/j.jce.2011.02.001
Sayılır, Ö., Doğan, M., & Soud, N. S. (2018). Financial development and governance relationships. Applied Economics Letters, 25(20), 1466–1470. https://doi.org/10.1080/13504851.2018.1430311
Smales, A. (2015). Better the devil you know: The influence of political incumbency on Australian financial market uncertainty. Research in International Business and Finance, 33(1), 59–74. https://doi.org/10.1016/j.ribaf.2014.06.002
Shen, Ch.-H., & Lin, Ch.-Y. (2012). Why government banks underperform: A political interference view. Journal of Financial Intermediation, 21(2), 181–202. https://doi.org/10.1016/j.jfi.2011.06.003
Sum, V. (2014). Can firms with the best training program withstand the storm of economic policy uncertainty? Journal of Business Economics and Management, 16(1), 206–213. https://doi.org/10.3846/16111699.2012.761647
Toraman, C., & Tuncay, M. (2017). Effect of the political risk on capital asset valuation in financial markets: The case of Turkey. Business and Economics Research Journal, 8(3), 413–432. https://doi.org/10.20409/berj.2017.58
Vasconcelos, A. M. (2018). Why political risk matters for banking flows? In Proceedings of the 40 International Academic Conference, Stockholm. International Institute of Social and Economic Sciences. https://doi.org/10.20472/IAC.2018.040.066
Witkowska, D., Kompa, K., & Mentel, G. (2019). The effect of government decisions on the efficiency of the investment funds market in Poland. Journal of Business Economics and Management, 20(3), 573–594. https://doi.org/10.3846/jbem.2019.9861
Wooldridge, J. (2003). Introductory econometrics – a modern approach (2nd ed.). South-Western Publishing Co.