Macroeconomic, Institutional, and Accounting Drivers of Banking Fragility in Europe

Authors

  • Pankaj Singh Department of Economics, Delhi School of Economics, University of Delhi, Delhi, India Author
  • Sunil Das Department of Economics, Delhi School of Economics, University of Delhi, Delhi, India Author
  • Vijay Kumar Department of Economics, Delhi School of Economics, University of Delhi, Delhi, India Author

Keywords:

Banking Stability, Non-Performing Loans, European Banking Crisis

Abstract

The recent fragility of the European banking system has prompted a deeper examination of the key indicators that influence the stability and soundness of its banking institutions. Our study focuses on 40 consolidated banking groups across 10 European countries and aims to identify the main factors that contribute to the vulnerability of these institutions, with a particular emphasis on the regulatory and economic environment that could exacerbate financial instability. To analyze this, we employed binary logistic regression as our econometric model, a method suitable for examining the relationship between various independent variables and the likelihood of a banking crisis occurring. In our analysis, we incorporated a broad range of variables, including accounting indicators, macroeconomic factors (such as GDP growth, inflation, and interest rates), and key regulatory, legal, and institutional variables that could influence the resilience of banking institutions. By integrating these different dimensions, we sought to develop a comprehensive understanding of the underlying causes of banking crises and how these factors interact with each other. The results of our study reveal several key insights. Notably, one of the most significant findings is that doubtful credit—a measure of non-performing loans or loans that are at risk of default—emerges as the primary factor contributing to the onset of the European banking crisis. This finding underscores the critical role that asset quality plays in the overall health of banking institutions. Doubtful credit acts as a key signal for potential distress, as it can severely affect a bank's liquidity, profitability, and solvency, especially if the proportion of non-performing loans increases rapidly. Additionally, our study highlights the importance of sound regulatory frameworks and legal structures in maintaining banking system stability. While accounting variables like capital adequacy ratios and profitability are crucial for assessing the immediate financial health of banks, institutional factors such as the strength of financial supervision, regulatory compliance, and the legal framework for resolving distressed banks also play a critical role in determining the overall resilience of the banking sector. In terms of macroeconomic factors, the findings suggest that broader economic conditions—such as GDP growth, inflation, and interest rates—have a significant impact on the stability of banks. During periods of economic downturn or when macroeconomic conditions deteriorate, the probability of banking distress increases, particularly when banks are heavily exposed to sectors or countries that are more vulnerable to economic shocks.

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Published

2024-12-25

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Articles

How to Cite

Singh, P. ., Das, S. ., & Kumar, V. . (2024). Macroeconomic, Institutional, and Accounting Drivers of Banking Fragility in Europe. Journal of Business and Economic Options, 7(4), 53-62. http://resdojournals.com/index.php/jbeo/article/view/394