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Banking Stability Index: New EU countries after Ten Years of Membership

Kristína Kočišová () and Daniel Stavarek ()
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Kristína Kočišová: Department of Banking and Investments, Faculty of Economics, Technical University of Košice

No 24, Working Papers from Silesian University, School of Business Administration

Abstract: Successful development of economy is based on the effective and stable performance of credit institutions, mainly banks. Evaluation of stability and soundness of banks is a complex task that involves a significant number of multidimensional criteria. This paper discusses some of the existing efforts to construct an aggregate financial stability index and brings attempts to construct an aggregate Banking Stability Index (BSI). We try to construct an aggregate index, taking into account indicators of financial strength of banks (performance and capital adequacy) and major risks (credit risk and liquidity risk) affecting banks in the banking system. Based on the international experience an aggregate BSI is then used for evaluation of stability in the European Union (EU) countries, focusing on ten countries that joined EU in 2004. We obtained data from database of the International Monetary Fund. Results showed that in 2014 countries with the most stable banking sectors were Luxembourg and Estonia. On the opposite end of the scale were banking sectors in Spain, Portugal, and Greece. The outcome of the study showed decline of the average banking stability in EU countries during the period of 2005-2008, and its improvement since 2009. The improvement in last years was positively affected mainly by development of the capital adequacy (which may be affected by the gradual implementation of decrees in the field of capital requirements regulation). Results also showed that the countries that joined EU in 2004 were positively affected by accession to EU what is evidenced by the value of BSI, which increased between the years 2004 and 2014.

Keywords: financial soundness indicators; aggregate index; banking sector; EU countries (search for similar items in EconPapers)
JEL-codes: C20 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba and nep-eec
Date: 2015-12-10
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