ABSTRACT
The banking sector and the stock market in Europe have been adversely impacted by a series of global financial crises over the last two decades. Major financial reforms were implemented to enhance the stability and competition within the banking sector. Measures were also implemented to create a vibrant stock market in Europe to stimulate economic growth in Europe. This study examines the interactions between stock market development, banking competition, and banking stability in European countries from 1996 to 2016. The purpose of the study is to understand the inter-linkages between these variables to ascertain the spillover impact of policy reforms in the banking sector on the stock market and vice-versa. Using a vector error-correction model, the study finds long-run and short-run inter-linkages between banking competition, banking stability, and stock market development in European countries. The study’s most robust result is that banking competition and banking stability stimulate stock market development in the long run. There is also some evidence that healthy competition in the banking sector and stock market development instils greater stability in the banking sector. The results suggest that policy measures put in place to create a vibrant stock market must include elevating banking competition and banking stability, with policymakers being cognizant that causality may be bidirectional.
Acknowledgments
The authors appreciate the helpful comments of an anonymous reviewer of this journal.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
2 See, for example, Allen and Gale (Citation2004), Beck (Citation2008), Broecker (Citation1990), Hellmann, Murdock, and Stiglitz (Citation2000), Shaffer (Citation1998), Martinez-Miera and Repullo (Citation2010), and Wagner (Citation2010).
3 See, for example, De Nicoló, Jalal, and Boyd (Citation2006), De Nicoló and Lucchetta (Citation2009), Schaeck, Cihak, and Wolfe (Citation2009), Jeon and Lim (Citation2013), and Schaeck and Cihak (Citation2014).
4 The choice of this time period was due to the availability of the data needed to undertake advanced panel data analysis for these three variables under study. Specifically, the choice of starting year of 1996 was due to the fact that it was challenging to obtain detailed data, especially for banking competition and banking stability in European countries, for earlier years.
5 As noted earlier, while the Beck, De Jonghe, and Schepens (Citation2013) study considers stock market turnover, it does not entertain a full set of indicators for stock market development.
6 The variables used to proxy for banking competition were selected based on variables used in previous studies. See, for example, Amidu and Wolfe (Citation2013), Andrievskaya and Semenova (Citation2016), Berger, Klapper, and Turk-Ariss (Citation2009), Beck (Citation2008), Beck, De Jonghe, and Schepens (Citation2013), Fiordelisi and Mare (Citation2014), Hauner and Peiris (Citation2008), and Tabak, Fazio, and Cajueiro (Citation2012).
7 The variables used to proxy for banking stability were selected based on variables used in previous studies. See, for instance, Amidu and Wolfe (Citation2013), Berger, Klapper, and Turk-Ariss (Citation2009), Beck, De Jonghe, and Schepens (Citation2013), Fiordelisi and Mare (Citation2014), and Tabak, Fazio, and Cajueiro (Citation2012).
8 Cointegration would suggest existence of a long-run equilibrium relationship among the variables even though short-term departures from equilibrium may exist.
9 The unit root test was used to determine the stationarity of all variables. The test procedures follow the assumption of both common unit root process and individual unit root process.
10 Results of both panel unit root and panel cointegration tests are available on request and are not reported here due to space constraint.
Coccorese, P. 2004. “Banking Competition and Macroeconomic Conditions: A Disaggregate Analysis.” Journal of International Financial Markets, Institutions and Money 14 (3): 203–219. Levine, R. 2001. “International Financial Liberalization and Economic Growth.” Review of International Economics 9 (4): 688–702. Beck, T., A. Demirguc-Kunt, and R. Levine. 2004. “Bank Competition and Access to Finance: International Evidence.” Journal of Money, Credit and Banking 36 (3): 627–648. Cetorelli, N., and M. Gambera. 2001. “Banking Market Structure, Financial Dependence and Growth: International Evidence from Industry Data.” Journal of Finance 56 (2): 617–648. doi:10.1111/0022-1082.00339. Levine, R. 1998. “The Legal Environment, Banks, and Long-Run Economic Growth.” Journal of Money, Credit and Banking, 30 (3): 596–613. Beck, T. 2008. Bank Competition and Financial Stability: Friends or Foes? Washington, DC: World Bank. Hellmann, T. F., K. C. Murdock, and J. E. Stiglitz. 2000. “Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough.” American Economic Review 90 (1): 147–165. doi:10.1257/aer.90.1.147. Martinez-Miera, D., and R. Repullo. 2010. “Does Competition Reduce the Risk of Bank Failure?” Review of Financial Studies 23 (10): 3638–3664. Wagner, W. 2010. “Loan Market Competition and Bank Risk-Taking.” Journal of Financial Services Research 37 (1): 71–81. doi:10.1007/s10693-009-0073-8. Schaeck, K., M. Cihak, and S. Wolfe. 2009. “Are Competitive Banking Systems More Stable?” Journal of Money, Credit and Banking 41 (4): 712–734. doi:10.1111/j.1538-4616.2009.00228. Jeon, J. Q., and K. K. Lim. 2013. “Bank Competition and Financial Stability: A Comparison of Commercial Banks and Mutual Savings Banks in Korea.” Pacific-Basin Finance Journal 25 (1): 253–272. Schaeck, K., and M. Cihak. 2014. “Competition, Efficiency, and Stability in Banking.” Financial Management 43 (1): 215–241. doi:10.1111/fima.12010. Beck, T., O. De Jonghe, and G. Schepens. 2013. “Bank Competition and Stability: Cross-Country Heterogeneity.” Journal of Financial Intermediation 22 (2): 218–244. Amidu, M., and S. Wolfe. 2013. “Does Bank Competition and Diversification Lead to Greater Stability? Evidence from Emerging Markets.” Review of Development Finance 3 (3): 152–166. Andrievskaya, I., and M. Semenova. 2016. “Does Banking System Transparency Enhance Bank Competition? Cross-Country Evidence.” Journal of Financial Stability 23 (3): 33–50. Berger, A. N., L. F. Klapper, and R. Turk-Ariss. 2009. “Bank Competition and Financial Stability.” Journal of Financial Services Research 35 (2): 99–118. doi:10.1007/s10693-008-0050-7. Beck, T. 2008. Bank Competition and Financial Stability: Friends or Foes? Washington, DC: World Bank. Beck, T., O. De Jonghe, and G. Schepens. 2013. “Bank Competition and Stability: Cross-Country Heterogeneity.” Journal of Financial Intermediation 22 (2): 218–244. Fiordelisi, F., and D. S. Mare. 2014. “Competition and Financial Stability in European Cooperative Banks.” Journal of International Money and Finance 45 (3): 1–16. doi:10.1016/j.jimonfin.2014.02.008. Hauner, D., and S. J. Peiris. 2008. “Banking Efficiency and Competition in Low Income Countries: The Case of Uganda.” Applied Economics 40 (21): 2703–2720. Tabak, B. M., D. M. Fazio, and D. O. Cajueiro. 2012. “The Relationship between Banking Market Competition and Risk-Taking: Do Size and Capitalization Matter?” Journal of Banking and Finance 36 (12): 3366–3381. doi:10.1016/j.jbankfin.2012.07.022. Amidu, M., and S. Wolfe. 2013. “Does Bank Competition and Diversification Lead to Greater Stability? Evidence from Emerging Markets.” Review of Development Finance 3 (3): 152–166. Berger, A. N., L. F. Klapper, and R. Turk-Ariss. 2009. “Bank Competition and Financial Stability.” Journal of Financial Services Research 35 (2): 99–118. doi:10.1007/s10693-008-0050-7. Beck, T., O. De Jonghe, and G. Schepens. 2013. “Bank Competition and Stability: Cross-Country Heterogeneity.” Journal of Financial Intermediation 22 (2): 218–244. Fiordelisi, F., and D. S. Mare. 2014. “Competition and Financial Stability in European Cooperative Banks.” Journal of International Money and Finance 45 (3): 1–16. doi:10.1016/j.jimonfin.2014.02.008. Tabak, B. M., D. M. Fazio, and D. O. Cajueiro. 2012. “The Relationship between Banking Market Competition and Risk-Taking: Do Size and Capitalization Matter?” Journal of Banking and Finance 36 (12): 3366–3381. doi:10.1016/j.jbankfin.2012.07.022.