AUSTERITY AND BANKING: THE IMPACT OF FISCAL CONSOLIDATION ON BANK EFFICIENCY AND STABILITY

Joao Jalles and André Teixeira

No 2025/0370, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: This paper explores the impact of fiscal consolidations on banking behavior, focusing on efficiency and stability. Using a panel dataset covering 194 countries from 1989 to 2020 and employing local projection methods, we find that fiscal consolidations improve bank stability at the expense of efficiency. The decline in efficiency is attributed to reduced operational income, while stability gains stem from improved asset quality and bolstered capital adequacy. The effects are heterogeneous: consolidations have a more substantial negative impact on efficiency in advanced economies, while stability improvements are more pronounced in emerging markets. The size and composition of fiscal adjustments also matter: tax-based consolidations favor stability more than expenditure-based ones. Robustness checks with alternative definitions of fiscal consolidations and non-linear models confirm these findings. The findings emphasize the importance of tailoring fiscal consolidations to country-specific factors to balance stability and efficiency in the banking sector.

Keywords: fiscal consolidations; bank efficiency; financial stability; tax-based adjustments; panel data; local projections. (search for similar items in EconPapers)
JEL-codes: C23 E62 F34 G21 H3 (search for similar items in EconPapers)
Date: 2025-02
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