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Banking stability determinants: evidence from Portugal

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Abstract

This paper aims to assess banking stability and its determinants in Portugal during the period of 2010—2019. The empirical study starts with the construction of an index, which reflects the aggregated banking stability index (ABSI), using financial soundness indicators (FSI) over the period of 2010–2019, on a quarterly basis. The ABSI is then used as the dependent variable to assess the determinants of the Portuguese banking stability. The independent variables were classified into macroeconomic and financial variables, respectively, and the ARMA conditional least square method was considered. The findings suggest an improvement in stability since 2017, and point to significant macroeconomic early warning indicators, such as the growth rate of the consumer price index (%ΔCPI), as well as financial ones, such as the ratio of the second money multiplier (M2) to gross domestic product (GDP). This paper contributes to the banking stability literature by examining the Portuguese case for the first time. The results put in evidence that both macroeconomic and financial indicators can be useful predictors of banking instability.

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Source: Eurostat

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Notes

  1. Which has been gaining greater influence in the economy. According to Haldane et al. [37] the “growth in the financial sector value added has been more than double that of the economy as a whole since 1850” in the U.K., similar trend were observed for the U.S. and Europe.

  2. For more information, see box 4.1 [5].

  3. For more information, see box 4.1 [6].

  4. For more information see box 3 [10].

  5. For more information see box 2 [12].

  6. Where C stands for capital adequacy, A for asset quality, M for management soundness, E for earnings, and L for liquidity.

  7. A level indicator, a rate of change indicator, and a correlation indicator.

  8. The Monetary Conditions Index were previously developed by central banks to assess monetary policy transmission in the 1990s.

  9. Type I errors represent the probability of failing to signal a crisis, whereas Type II errors are the probability of falsely signalling a crisis.

  10. Insolvency risk, credit risk, profitability, liquidity risk, and currency risk.

  11. Most of the indicators were extracted from Demirgüç-Kunt and Detragiache [26], Kaminsky [47], and Davis and Karim [25].

  12. The Ifo index is an index developed by the Ifo institute for Economic Research, which measures expectations based on a survey of manufacturers, builders, wholesalers, and retailers.

  13. This restriction was highly influenced by the sovereign debt crisis.

  14. Results available from the authors upon request.

  15. The estimation method used for Eq. (3) was the ordinary least squares method. ARMA conditional least squares was used to model the autoregressive components in Eqs. (4), (5), and (6).

  16. Results available from the authors upon request.

  17. "Results available from the authors upon request.

  18. A negative skewness indicates a left-sided tail, which means a larger number of observations below the average.

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Acknowledgements

The authors acknowledge financial Support from FCT—Fundação para a Ciência e Tecnologia (Portugal), national funding through research grant UIDB/05069/2020.

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Authors and Affiliations

  1. ISEG, Lisbon School of Economics and Management, University of Lisbon, Rua Miguel Lupi, 20, 1249-078, Lisbon, Portugal

    Maria Teresa Medeiros Garcia & Simão Rodrigues Abreu

  2. UECE/REM-ISEG, Universidade de Lisboa, Lisbon, Portugal

    Maria Teresa Medeiros Garcia

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  1. Maria Teresa Medeiros Garcia
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  2. Simão Rodrigues Abreu
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Correspondence to Maria Teresa Medeiros Garcia.

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Garcia, M.T.M., Abreu, S.R. Banking stability determinants: evidence from Portugal. J Bank Regul (2023). https://doi.org/10.1057/s41261-023-00222-x

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