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Banking stability determinants: evidence from Portugal

Author

Listed:
  • Maria Teresa Medeiros Garcia

    (ISEG, Lisbon School of Economics and Management, University of Lisbon
    UECE/REM-ISEG, Universidade de Lisboa)

  • Simão Rodrigues Abreu

    (ISEG, Lisbon School of Economics and Management, University of Lisbon)

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.

Suggested Citation

  • Maria Teresa Medeiros Garcia & Simão Rodrigues Abreu, 2024. "Banking stability determinants: evidence from Portugal," Journal of Banking Regulation, Palgrave Macmillan, vol. 25(2), pages 160-178, June.
    • Handle: RePEc:pal:jbkreg:v:25:y:2024:i:2:d:10.1057_s41261-023-00222-x
    DOI: 10.1057/s41261-023-00222-x
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    More about this item

    Keywords

    Banking system stability; Time series regression; Stability index; Financial soundness indicators; Macroprudential indicators; Portugal;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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