The relevance of the European Union banking sector to economic growth

This paper seeks to improve upon the existing literature by testing the contribution of the European Union (EU) banking institutions’ performance, proxied by some relevant financial ratios, to economic growth during the last decade and particularly after the recent financial crisis. Using static and dynamic panel estimation methods on a data set including all 28 current EU member states, we compare the results obtained for two panels: one considering the years between 1998 and 2012 and a second one for the subinterval spanning only from 2007 to 2012.

In our estimations we use data sourced from the European Commission's database, Annual Macroeconomic (AMECO), more precisely the dependent variable, GDP and also the financial sector leverage, that is, the ratio of debt to equity. All the other financial ratios are sourced from the privately owned financial database maintained by the Bureau van Dijk, BankScope.

Taking into account the classifications and definitions proposed by the BankScope database we consider the banking sector (all commercial and savings banks) of each of the 28 current EU member states and opt to use different kinds of financial ratios.

More precisely, we include operational ratios (Net Interest Margin, Return on Average Assets, Cost to Income), capital ratios (Equity to Total Assets, Debt to Equity, Equity to Liabilities), liquidity ratios (Net Loans to Total Assets Ratio, Net Loans to Total Deposits and Borrowings) and an assets quality ratio (Impaired Loans to Gross Loans).

The results obtained allow us to draw conclusions not only on the importance of the variation of different operational, capital, liquidity and assets quality financial ratios to economic growth but also on some differences evidenced in the two considered panels, reflecting the consequences of the recent financial crisis and the correspondent reactions of the European banking institutions.

Summarising, these results lead us to conclude that, although banking institutions were generally considered responsible for the recent financial crisis, their wealthy performance could also be a relevant contribution to economic growth, at least in the universe of all 28 EU member states during the last decade.