Banking system stability and economic sustainability: A panel data analysis of the effect of banking system stability on sustainability of some selected developing countries

Abstract

The study investigated the effects of banking system stability on economic sustainability from the perspective of 37 developing economies for the period 2000–2016. The study applied panel data models precisely fixed effects and random effects models. Hausman test of endogeneity revealed fixed effects model as the most appropriate in all estimations. Our empirical analysis revealed the following key findings: First, the study revealed that banking system z-scores has positive effect on economic sustainability of developing economies while banking system regulatory capital and bank credit have negative effects on economic sustainability among selected developing economies. Second, while banking system z-scores, bank liquid assets and bank credit have positive effects on economic sustainability of BRICS economies, bank liquid assets and bank credit have negative effects on economic sustainability of non-BRICS economies except banking system zscores, which has a positive effect. In addition, banking system z-scores has positive effect on economic sustainability of Asian and non-Asian economies. However, non-performing loans and bank credit has negative effects on economic sustainability of Asian economies while banking system regulatory capital has negative effect on economic sustainability of non-Asian economies. We conclude that banking system stability play a role in economic sustainability developing economies. However, banking system stability has differing effects on economic sustainability of BRICS and non-BRICS economies; and Asian and non-Asian economies.