Causal nexus between economic growth,banking sector development,stock market development,and other macroeconomic variables: The case of ASEAN countries

This paper examines the relationship between banking sector development, stock market development, economic growth, and four other macroeconomic variables in ASEAN countries for the period 1961–2012. Using principal component analysis for the construction of the development indices and a panel vector auto-regressive model for testing the Granger causalities, this study finds the presence of both unidirectional and bidirectional causality links between these variables. The study contributes to understanding the importance of the interrelationship between the variables and combines the different strands of the literature. It also contributes to the literature by focusing on a group of countries that have not been studied before. One particular policy recommendation is to make the banking sector more accessible for those country's inhabitants that do not have bank accounts. Another policy recommendation is to nurture stock market development, which will facilitate the increased raising of capital for investment purposes to enhance economic growth.     

Bank stock returns and economic growth

Previous research has established (i) that a country’s financial sector influence future economic growth and (ii) that stock market index returns affect future economic growth. We extend and tie together these two strands of the growth literature by analyzing the relationship between banking industry stock returns and future economic growth. Using dynamic panel techniques to analyze panel data from 18 developed and 18 emerging markets, we find a positive and significant relationship between bank stock returns and future GDP growth that is independent of the previously documented relationship between market index returns and economic growth. We also find that much of the informational content of bank stock returns is captured by country-specific and institutional characteristics, such as bank-accounting-disclosure standards, banking crises, enforcement of insider trading law and government ownership of banks.     

Stock markets, banks, and economic growth: Empirical evidence from the MENA region

Over the last four decades, a wide theoretical debate is concerned with the fundamental relationship between financial development and economic growth. Recent studies shed some light on the simultaneous effect of banks and financial system development on growth rather than a separate impact. The empirical study is conducted using an unbalanced panel data from 11 MENA region countries. Econometric issues will be based on estimation of a dynamic panel model with GMM estimators. Thus, peculiarities of MENA region countries will be detected. The empirical results reinforce the idea of no significant relationship between banking and stock market development, and growth. The association between bank development and economic growth is even negative after controlling for stock market development. This lack of relationship must be linked to underdeveloped financial systems in the MENA region that hamper economic growth. Then, more needs to be done to reinforce the institutional environment and improve the functioning of the banking sector in the MENA region. Based on these results, other regions at the same stage of financial development such as Africa, Eastern Europe or Latin America should improve the functioning of their financial system in order to prevent their economies from the negative impact of a shaky financial market.     

Finance and growth: Time series evidence on causality

This paper re-examines the empirical relationship between financial and economic development while (i) taking into account their dynamics and (ii) differentiating between stock market and banking sector development. We study the cointegration and causality between finance and growth for 22 advanced economies. Our time series analysis suggests that causality patterns depend on whether countries’ financial development stems from the stock market or the banking sector. We show that stock market development tends to cause economic development, while a reverse causality is mostly present between banking sector development and output growth. These findings indicate that the direction of causality between finance and growth is likely to be different at high levels of development.     

Strategic online banking adoption

In this paper we study the determinants of banks’ decisions to adopt a transactional website for their customers. Using a panel of commercial banks in the United States for the period 2003–2006, we show that although bank-specific characteristics are important determinants of banks’ adoption decisions, competition also plays a prominent role. The extent of competition is related to the geographic overlap of banks in different markets and their relative market share in terms of deposits. In particular, banks adopt online banking services earlier in markets where their competitors have already adopted this technology. This paper is one of the first to construct local banking markets using the geographic market definitions delimited by the CASSIDI® Database compiled at the Federal Reserve Bank of St. Louis.     

Banking deregulation and innovation

We document empirical support for a key micro-level channel—innovation by young, private firms—through which financial sector deregulation affects economic growth. We find that intrastate banking deregulation, which increased the local market power of banks, decreased the level and risk of innovation by young, private firms. In contrast, interstate banking deregulation, which decreased the local market power of banks, increased the level and risk of innovation by young, private firms. These contrasting effects on innovation also translated into contrasting effects on economic growth. Our study suggests that the nature of financial sector deregulation crucially affects its potential benefits to the real economy.     

银行结构与经济发展的因果关系——基于中国地区面板数据的实证检验

本文基于中国东、中、西部六省(市)1994年到2004年的面板数据对银行结构与经济发展的因果关系进行了实证研究。研究结果显示,在较短时间内是经济发展决定银行结构,而在较长时间内则是银行结构主动地影响到经济发展。所以在经济发展的初期受实体经济发展规模的限制,需要分散的银行结构;而随着经济的发展,特别是到了发达阶段,集中型银行结构能更好地促进经济的发展。     

Networks and equity market integration: European evidence

Deregulation, globalization, and technological developments have altered the business strategies of stock exchanges around the world. We investigate whether the adoption of network strategies by stock exchanges creates additional value in the provision of trading services. Using unbalanced panel data from all major European exchanges over the period 1996-2000, we examine the consequences of network cooperation on a number of stock market performance measures. We show that adopting a network strategy is associated with higher market capitalization, lower transaction costs, higher growth, and enhanced international stock market integration.     

Internet finance development and banking market discipline: Evidence from China

Depositor discipline is the only viable and universal source of banking market discipline in China. This paper investigates whether the depositor discipline of banking works in the context of an emerging economy under financial repression and implicit government guarantee, such as the Chinese economy; how banking market discipline is affected by Internet finance development; and whether the impact of Internet finance development on market discipline changes across heterogeneous banks. The results suggest that, in general, measures of bank risk are negatively associated with the growth of deposit volumes. Internet finance development alters the sensitivity of deposit growth ratios to some bank risk measures. For non-state-owned banks, fewer measures of bank risk are significantly negatively associated with the growth of deposit volumes, and the attenuation impact of Internet finance development on market discipline for bank capitalization instead relatively increases. For large banks, market discipline works significantly, except in the case of the bank capitalization variable; moreover, these significant market disciplines are strengthened with the development of Internet finance.     

Broadband penetration,financial development,and economic growth nexus: evidence from the Arab League countries

This paper examines the mutual relationship between broadband penetration, financial development, and economic growth in the 22 Arab League countries for the period between 2001 and 2013. Financial development (represented by broad money supply, claims on the private sector, domestic credit to the private sector, domestic credit provided by the banking sector, market capitalization, turnover ratio, and traded stocks) is assessed both individually, and by a composite index. Our results reveal that there is a long-run equilibrium relationship between broadband penetration, financial development, and economic growth. Additionally, we use a panel vector autoregression model to reveal the nature of Granger causality between the covariates. The most important insight of this study is the presence of bidirectional causality from economic growth to broadband penetration in the long run. In addition, we find that financial development together with broadband penetration Granger-cause economic growth in the long run.     

Financial intermediation and economic growth: the post-liberalization Indian experience

The paper is concerned with the relationship between economic growth and financial intermediation, in particular stock market development, in post-liberalization India. It identifies three possible relationships: (a) the relationship between growth of manufacturing and growth of the stock market; (b) the relationship between growth of the stock market and growth of traditional financial intermediaries like banks; (c) the relationship between the growth of the primary stock market and that of the secondary stock market. These three relationships are empirically tested using Indian data. While the growth of turnover in the stock market is found to be positively correlated with the change in the growth of manufacturing and the growth of sales of new shares is found to positively affect the secondary market, evidence on the relationship between sales of new shares and traditional banking activities is mixed. The primary stock market is found to crowd out bank deposits, but crowd in bank credit.     

Financial development,government ownership of banks and firm innovation

Using a newly-available World Bank survey of over 28,000 firms from 46 countries, we examine how financial development affects firm innovation around the world. We find that while stock market development significantly enhances firm innovation, banking sector development has mixed effects. We show that the latter result can be explained by different levels of government ownership of banks. Specifically, in countries with lower government ownership of banks, banking sector development significantly enhances firm innovation; while in countries with higher government ownership of banks, banking sector development has no significant or sometimes even significantly negative effects on firm innovation. Such negative effects are significantly stronger for smaller firms. The results are robust to various controls such as firms’ human capital and ownership structure, to estimations using instrumental variable techniques and alternative measures of firm innovation.     

Banking industry volatility and economic growth

Utilizing the recent dynamic panel GMM estimation techniques for 36 markets, this research investigates the relationship between banking industry volatility and future economic growth, and provides empirical evidence complementary to Cole et al. (2008) who examine the finance-growth nexus from a unique asset pricing theory perspective and document a positive relationship between bank stock returns and future economic growth that is significantly influenced by a series of country-specific and banking institutional characteristics. We find that the negative link between banking industry volatility and future economic growth is significantly affected by government ownership of banks, the enforcement of the insider trading law, systemic banking crises, and bank accounting disclosure standards, while the impact of financial development is ambiguous. The significant results are primarily driven by the data from emerging markets.     

The Finance-growth Relationship and the Level of Country Development

We examine whether dynamic impacts of banks and stock markets on economic growth are related to the level of country development. Using annual data from 15 industrial and 15 emerging countries over the period from 1976 to 2005, we find that banking development and stock market development may have distinct short-and long-run impacts on economic growth at various stages of country development. Financial development is not always a panacea for economic growth. Most importantly, our findings suggest that the fully functional tools to render stable growth for a country may depend on the level of the country’s development.     

What drives the systemic banking crises in advanced economies?

This paper examines the drivers of post-war “systemic” banking crises in advanced economies. Using binary response models and a balanced panel of data, we show that persistently large departures from the long-run trend in housing and stock markets best predict the crises. Similar deviations in credit markets do not add to the explanatory power of the model that combines housing and stock market dynamics. Indicators capturing financial market risk perception also have high explanatory power. These findings indicate that extrapolative forecasts and neglect of tail risk drive asset market boom-bust cycles and systemic banking crises. Cycles in credit markets are driven by cycles in real-estate and stock markets before the crises. Additionally, capital inflow bonanzas fuel the stock and credit booms that spark systemic crises.     

银行业发展与经济增长:一个综述

经济危机背景下银行业发展与经济增长的关系成为理论界关注的焦点。本文从银行业规模、结构和效率三方面对国内外二者关系研究的主要文献进行梳理,研究发现国内外绝大多数学者肯定银行业规模因素尤其是银行信贷对于经济增长之间具有促进作用,同时却忽略银行负债规模对经济增长的影响;多数国内学者认为垄断性的银行市场结构对我国经济增长不利。当前的研究仍存在一些不足,如研究方法不合理,研究角度较为片面,过度重视银行业规模性和结构性因素而忽视效率因素对经济增长的影响等问题。     

Capital Market Regimes and Bank Structure in Europe

We hypothesize that fundamental features that distinguish European capital markets have predictably influenced emerging national differences in bank capitalization and loan growth. Using bank‐level data from 13 European countries, 1998 to 2004, we find evidence of positive effects of “equity‐friendly” market features on bank capitalization and positive effects of both “equity‐friendly” and “credit‐friendly” market features on loan growth. The findings are strongest in small banks and in banks with cooperative charters. Our results suggest that ongoing and prospective integration of European banking markets is mitigated by relatively static features of the equity and credit markets on which banks rely.     

Financial crises and emerging stock markets volatility: do internal factors matter?

This paper has two central aims. The first one is to deal empirically with the effects of financial crises on emerging stock markets volatility. The second objective consists in testing if the level of stock market development affects this relationship. For this purpose, we estimate a static panel data model for a sample of nine emerging economies from January 1990 to December 2006. We consider three types of financial crises, i.e. banking, currency and twin crises. Our empirical results suggest that the onset of financial crises strongly increased stock market volatility. In addition, we find that the biggest impact is exerted by twin crises. When dealing with the second objective, our results show that the market size and the liquidity level can attenuate the effects of banking and currency crises, but not the one associated to twin crises. Nevertheless, the degree of stock market integration seems to reduce the effects of banking, currency and twin crises on stock market volatility.     

Equity markets and growth: Cross-country evidence on timing and outcomes, 1980–1995

The rapid expansion of organized equity exchanges in both emerging and developed markets has prompted policymakers to raise important questions about their macroeconomic impact, yet the need to focus on recent data poses implementation difficulties for econometric studies of dynamic interactions between stock markets and economic performance in individual countries. This paper overcomes some of these difficulties by applying recent developments in the analysis of panels with a small time dimension to estimate vector autoregressions for a set of 47 countries with annual data for 1980–1995. After describing recent theories on the role of stock markets in growth and considering a pure cross-sectional empirical approach, our panel VARs show leading roles for stock market liquidity and the intensity of activity in traditional financial intermediaries on per capita output. The findings underscore the potential gains associated with developing deep and liquid financial markets in an increasingly global economy.