Identifying the nexus between financial stability and economic growth: the role of stability indicators

Abstract

Purpose This study aims to examine the interrelationship between financial stability and economic growth with a comprehensive analysis. Design/methodology/approach The panel Granger causality testing approach is carried out to the panels of the Fragile Five (F5) and the Group of Seven (G7) countries for the period 1998–2020. To capture the different aspects of financial stability the authors use eight different indicators. Findings The findings reveal some important implications: the relationship between financial stability and economic growth is sensitive to the financial stability indicators for both the F5 and G7 countries. The stability indicators related to the credit market contain much more causality relationship with economic growth than the indicators related to the stock market. Z-score and provisions to nonperforming loans (NPLs) are among the two variables with the highest causality relationship with economic growth. The least number of causality link is found for the Regulatory Capital Ratio and Stock Price Volatility in F5 countries and Credit Ratio, NPLs and Stock Price Volatility in G7 countries. Economic growth affects financial stability through credit market stability indicators and mostly for the F5 countries. No causal relationship is found for any of the financial stability indicators of Canada, the UK and the USA from economic growth to financial stability. Originality/value Since the linkages between financial stability and economic growth may vary due to country/group specific differences, apart from the previous studies, the authors select two different groups of countries in terms of financial stability and economic size.

Islamic and Conventional Banks Stability in Indonesia

“…They suggest that if not maintained properly, it might lead to a deterioration in banks' profitability and ultimately threaten stability due to their negative impact on the real economy. As found in the study of Kurtoglu & Durusu-Ciftci (2024), NPL is one of the factors with the highest causality with economic growth because of the significance of managing NPLs effectively to maintain the stability and health of the banking system (Desogus & Venturi, 2023).…”

“…Impaired Loan (IL) has a significant impact on bank stability, as indicated by Ijaz et al (2020), Khaled et al (2021), and Nwafor & Nwafor (2023). Liquid Assets (LA) has a significant relationship to stability (Kurtoglu & Durusu-Ciftci, 2024). Total Assets (LTA) as a bank size measure has a significant effect on bank stability, as highlighted by Ali & Puah (2019) and Cihak & Hesse (2010).…”