The banking sector, economic growth and European integration

The Authors

Cândida Ferreira, ISEG-UTL, Technical University of Lisbon, Lisboa, Portugal

Acknowledgements

JEL classification – C23, E44, F36

Abstract

Purpose – This paper seeks to contribute to the study of the link between financial intermediation and economic growth in the context of the European Union and particularly in the context of the integration of new member-states.

Design/methodology/approach – Panel fixed and dynamic Arellano-Bond estimates (with balanced panels) were used to explain and compare the influence of financial intermediation with the real per-capita GDP growth in two sub-sets of EU countries: the first one takes into account the availability of quarterly data and comprises 11 “old” EU countries, excluding Luxembourg, Denmark, Ireland and Sweden, for the period between Q2 1980 and Q4 1998; the second panel includes 24 EU countries (excluding only Luxembourg) for the period between Q2 1999 and Q4 2002. The existing empirical evidence was enhanced by introducing some financial variables to explain the real per-capita GDP growth, namely, the real domestic credit growth, the real foreign liabilities growth, the real growth of the sum of the bonds and money market instruments, in addition to two ratios: bank assets/bank liabilities and domestic credit/bank deposits.

Findings – The results obtained confirm the importance of these variables to the real per-capita GDP growth and allow one to draw conclusions on some differences in the behaviour and the level of integration of the two groups of EU countries. There is a relatively more homogeneous behaviour in the first panel, while the results for the second panel indicate that, in spite of the relative heterogeneity and the differences in their historical evolution, all the countries have had to adapt rapidly to the increasing competition and to the new EU market conditions.

Originality/value – The paper confirms the influence of financial systems on output growth, as well as the efforts of financial institutions to adapt to the new conditions of the European and global markets in spite of all the differences in the historical evolution and initial conditions among EU member-states.

Article Type:

Research paper

Keyword(s):

Financial control; Financial restructuring; European Union.

Journal:

Journal of Economic Studies

Volume:

Number:

Year:

2008

pp:

512-527

Copyright ©

Emerald Group Publishing Limited

ISSN:

0144-3585

1. Introduction

Financial development may be an important condition for economic growth, since well-functioning markets and financial institutions may decrease the transaction costs and asymmetric information problems. At the same time, financial institutions play an increasingly important role in identifying investment opportunities, selecting the most profitable projects, mobilising savings, facilitating trading and the diversification of risk, as well as improving corporate governance mechanisms. More efficient credit sectors may also represent a necessary and important condition for the transmission mechanism of monetary policy.

In the European Union (EU), the introduction of the single currency accelerated the process of consolidation and financial integration, not only in the countries of the Economic and Monetary Union (EMU), but in the EU as a whole, in which the newest member-states also have a voice, in spite of the heterogeneous situation of their specific financial systems.

The process of financial integration is, on one hand, a necessary pre-requisite for the adoption of the single currency and the implementation of the single monetary policy, with the predominance of the banking intermediation in the context of the EU. On the other hand, this process raises the potential to incite liquidity crises, which could became contagious and affect the increasingly integrated European financial system.

This paper is a contribution to the study of the link between financial intermediation and economic growth in the context of the EU and particularly, in the context of the integration of new member-states and their specific financial systems.

Our principal contribution is an empirical data analysis of the influence of the financial systems on the economic growth of the EU countries. We use IMF and Eurostat quarterly data to analyse the possible influence of the financial systems on economic growth. More precisely, we explain the real per-capita GDP growth with: the real growth of domestic credit, the foreign liabilities, the sum of the bonds and money market instruments, the ratio, bank assets/bank liabilities, and the ratio, domestic credit/bank deposits.

In the estimations, always taking into account the availability of quarterly data and the decision to use balanced panels, we consider two sub-sets of EU countries:

“old” EU member-countries for the period between Q2 1980 and Q4 1998, excluding Luxembourg, Denmark, Ireland and Sweden. These countries could not be included because quarterly data was not available. Luxembourg is a very specific country and most of the financial variables were not available for the considered period. In the case of Denmark, quarterly GDP is available only from Q1 1987. For Ireland, quarterly GDP is available only from Q1 1997, while for Sweden, quarterly Domestic Credit is available only from Q4 1985.
EU countries (excluding only Luxembourg) for the period between Q2 1999 and Q4 2002.

The results obtained allow us to draw conclusions not only on the importance of the financial sector to economic growth, but also on some differences in the behaviour and the level of integration in the two considered sub-sets of countries.

The remainder of the paper is organised as follows: Section 2 presents relevant literature on the link between financial systems and growth, as well as on some specific questions arising from financial integration within the EU; in Section 3, we present our estimations and the results obtained with panel fixed robust estimations and dynamic Arellano-Bond GMM robust estimations; our concluding remarks are presented in Section 4.

2. Contextual setting and literature

During the last decade, and particularly since the renowned King and Levine (1993) paper, there has been an increase of empirical studies at the aggregate level which explain output variables with financial ratios and variables such as liquid liabilities, bank loans to the private sector, or stock market capitalisation, which may be representative of the performance of the financial systems and institutions.

In one such study, Levine and Zervos (1998), using data for 49 countries for the period 1976-1990, conclude that there is a strong correlation between the rates of real per-capita output growth and stock market liquidity.

The influence of financial variables (particularly the liquid liabilities and the private credit from deposit banks in relation to GDP) on real per-capita output growth is also demonstrated by Leahy et al. (2001), using data for 19 OECD countries for the years between 1970 and 1997. Similar variables (more precisely, liquid liabilities, private credit from deposit banks and stock market capitalisation, all in relation to GDP) are used by Bassanini et al. (2001), who use data for 24 OECD countries (1971-1998) obtaining better results for stock markets than for bank variables.

Examining 9 OECD countries and available series with different starts between 1960 and 1986 and ending in 1998, Shan et al. (2001) explain real per-capita GDP by bank credit to GDP and conclude that the causality varies among countries.

Demirguç-Kunt and Levine (1999), with data for 150 countries during the 1990s, conclude that the rich countries have more developed financial systems, characterising this development by the size and efficiency of the financial sector, measured by the assets, liabilities, overhead costs and interest margins. Comparing financial systems of different countries and regions, Allen and Gale (2000) conclude that there is inherent inefficiency within the monopolistic power of banks, which may also adopt an excessively conservative approach while the competitive nature of markets tends to encourage innovation and growth-enhancing activities.

Recently, Beck et al. (2004) have used the ratio of the value of credit from financial intermediaries to the private sector, divided by GDP as a proxy to capture the depth and breadth of the financial intermediation in a panel of 52 countries over the period 1960 to 1999. They conclude that financial development is not only clearly pro-growth but also pro-poor, that is, in countries with better-developed financial intermediation, income inequality declines more rapidly.

Summarising these studies, we must agree with Khan and Senhadji (2000), who, in providing a review of the literature and empirical evidence of the relationship between financial development and economic growth, concluded that the results indicate that while the general effects of financial development on the outputs are positive, the size of these effects varies with the different variables considered, with indicators of financial development and with the estimation method, data frequency or the defined functional form of the relationship.

At the same time, it is recognised that financial institutions play a unique role in the context of the Single Market Program (SMP) and the EMU, despite the fact that the EU banking sector has been considered as one of the sectors least affected by the SMP (Monti, 1996; Gardener et al., 2002), while other results suggest that Europe is converging towards becoming an optimum currency area (Kempa, 2002).

The introduction of the EMU reduces some of the competitive advantages of local and national banks (advantages which were based on factors like currency risk, lack of price transparency and greater knowledge of national monetary policy), but it also increases competition in all financial-product market segments. The structural changes due to the adoption of the single currency and a common monetary policy are exerting a profound impact on the Euro area finance sector and intensifying competition for banking services. The relationship between financial integration and economic growth is currently emphasised by authors like Obstfeld and Taylor (2003), being particularly relevant in the context of the new EU.

Some common trends may be identified in the context of the pressures of globalisation, which affect the Euro area with particular intensity, specifically, a process of disintermediation, new technologies and increased competition (Belaisch et al., 2001).

Despite all the changes and disintermediation, the EU's bank asset structure reflects the rapid increase of lending since the advent of the EMU. The process started before the implementation of the single currency and reflects the growing demand for credit provoked by the downward path of interest-rate levels during the 1990s.

At the present time, it remains true that the Euro area's financial and credit systems continue to be bank-dominated; the ECB (more precisely, the European System of Central Banks and its Banking Supervision Committee) is obliged to monitor and supervise closely the banking activity and structural developments in the EU banking sector.

The inadequacy of the present extent of financial regulation in the context of the EMU is emphasised by authors like Vives (2001), who defends a reform to establish clear procedures designed to confronting hypothetical crises in lending and moreover, to prepare the implementation of more centralised supervisory arrangements in the whole financial system, with specific regard to the banking sector. Measures are required in order to increase the competition and to restrain the national power of the “too- large-to-fail” institutions.

The “Structural Analysis of the EU Banking Sector”, published by the ECB (2002) in November 2002, identifies three sets of trends which contribute to the present resilience of the European banking systems, namely:

the need of banks to increase income and control costs – in order to increase income, banks must diversify their credit lines (looking for new business and geographical areas);
financial innovation to face the changes in risk and risk management – to develop more sophisticated approaches to risk management, like the use of credit derivatives and securitisation; and
the growing importance of consumer issues – with financial innovation, commercial banks have moved into specific areas, such as investment banking and asset management, and are now more exposed to the performance of the other markets and global economical conditions.

Thus, in recent years, and in spite of all the remaining limitations in the supervision process, in addition to the profound structural changes due to the implementation of the single currency and the common monetary policy, and despite all the recent political shocks, EU banks have generally demonstrated a remarkable robustness. They have diversified their activities and financial innovations against a background of increasing competition, under continuing pressure not only to increase their income and profits, but also to guarantee most of the transmission mechanisms of the monetary policy and to maintain the financial stability of the whole system.

Following the recent historically remarkable enlargement, which brought the entry of ten countries at the same time in 2004 (two more countries, Bulgaria and Romania, have since acceded to the EU, but as this only took place in 2007, we did not include them in our estimations), the EU is still adapting to the conditions of the EMU and to this new universe of countries.

Particular attention must be paid to the sector after the last enlargement to new member-states, particularly those under the former-Soviet Union sphere of influence. Until the collapse of the Warsaw Pact, central banks and the State-owned commercial banks, most of them segmented functionally as specific State saving banks, State foreign trade banks, State agriculture banks or State construction banks, were mere instruments in the hands of the respective governments, passively executing the payment orders to the public employees and monitoring the payment flows between the enterprises, which were also state-owned. Under these conditions, there was no need for financial systems to allocate savings to investment, as this was carried out in accordance with the Plan, without compensation or any assigning of value.

However, in a quite short period of time these banks moved from the structure of socialist banking, in which the financial organisations were used to support the central banking system, to a market economy and the concomitant decentralisation and the liberalisation of the banking systems.

In most of these Eastern and Central European countries, there were forms and programmes to amend property rights and processes of privatisations of part of the State property, which increased the importance of the private sector and firms and the particularly relevant role of the financial intermediaries and banking institutions. There is a quite strong consensus on the increased performance and efficiency of the banks under the new market conditions. Several studies (Backhaus, 2003; Sztyber, 2003; Hanousek and Kocenda, 2003; Stephen and Backhaus, 2003; Tchipev, 2003; Vitkovic, 2003; Bonin and Watchel, 2004; Bonin et al., 2005a, 2005b; Fries and Taci, 2005; Fries et al., 2006) confirm the relevant improvements in efficiency of the banking systems of the new EU members and the effects of ownership, concluding that foreign-owned banks are usually more cost-efficient. Other studies also analyse how, and to what extent, the banking sectors of the new member-states have integrated with those of the older EU members and the process of nominal and real convergence of these countries to EU standards (ECB, 2005; Kocenda et al., 2006).

According to the characteristics of the recent transition processes in the new EU member-states, and in spite of their specificities (Holscher, 2000; Dimitrova, 2004), it is possible to define some groups according to their similarities in the financial-sector transition, namely: the “advanced reformers” (Poland and Hungary), the “reluctant modernisers” (the Czech Republic and Slovenia), those “struggling with a double legacy” (Slovakia and Croatia), or the “desperate reformers” (Romania and Bulgaria) (Winkler, 2002, p. 16).

However, three essential pillars are in place to assist the financial-sector development of the new member-states and to assure the conditions propitious to an increasing integration in the EU and possibly also in the EMU financial systems. These pillars are (Winkler, p. 35): the internal and external government structures; the domestic and international competition and also the prudential regulation supervision. All three could also be accepted as strong and necessary pillars for the development of the financial systems, particularly the banking sectors, of the older EU member-states and above all, of the EMU members.

3. Empirical estimations

The methods used in the different aggregate estimations which look for empirical evidence of the relationship between financial development and economic growth are mainly co-integration analysis, correlations, cross-country regressions and panel regressions.

One of the most common problems of these estimations is the difficulty in harmonising and making compatible the available data since, in spite of all the efforts of the ECB, Eurostat, the IMF and other international institutions, the study of financial structures and financial developments in the context of the EU remains a difficult task. This is due not only to the lack of data, but also to the inherent complexity of the financial structures, as well as the constant changes and the specificities of the financial structures in the different EU countries.

Using quarterly data of the Eurostat and IMF statistics, we contribute to the existing empirical evidence of the influence of financial systems and EU integration on economic growth in two ways:

by using panel fixed effects robust estimates as well as dynamic Arellano-Bond robust estimates to explain the log of the real per-capita GDP, admitting several variables to represent the conditions and the role of the financial systems; and
by using two different balanced panels with two sub-sets of EU countries to analyse the degree of integration in each of these sub-sets and establish some possible comparisons.

To analyse the influence of the financial system on the log of the real GDP per-capita (LGDP), we use the following explaining variables and ratios, all in 1995 prices (in Tables I and II, we present the summary statistics and the correlation matrixes of the considered variables in both panels of EU countries):

The log of the domestic credit (LCREDIT). As the available credit is one of the important guarantees for the financing of the economic activity, specifically for the productive investment and GDP per-capita growth. With properly functioning financial institutions, the credit provided will contribute positively to GDP growth.
The log of the foreign liabilities (LFORLIAB). Introducing also the influence of the other countries, more precisely, the financial obligations towards foreign creditors, which may represent the entry of assets and contribute positively to GDP growth, but also imply the payment of debts and obligations to foreign investors and consequently, fewer resources to be applied in the domestic activities.
The log of the sum of the bonds and money market instruments (LBMMI). As a proxy to represent other activities of the financial system (mainly including banks, but also other financial institutions). Healthy financial markets and instruments are a guarantee for the direct and indirect financing of productive activities and contribute positively to GDP growth.
The ratio bank assets/bank liabilities (ASSETS/LIAB). Representing the financial situation of the banking institutions and their effectiveness by transforming their liabilities into assets which may be directed to the financing of GDP growth.
The ratio domestic credit/bank deposits (CREDIT/DEP). A strict measure of bank efficiency, since the main sources of the bank credits provided are usually the deposits of their customers. Well-developed financial systems provide a variety of financial instruments which may decrease bank saving deposits and force banks to find other resources to maintain their credit flows.

In order to analyse the degree of integration of the EU countries, we estimate and compare the results obtained for two different sub-sets:

a balanced panel with 825 observations, with data for the period between Q2 1980 and Q4 1998 for 11 “old” countries (excluding Luxembourg, Denmark, Ireland and Sweden, for the reasons that we explained earlier); and
a second balanced panel for 24 EU countries (excluding only Luxembourg) for the period between Q1 1999 and Q4 2002, with 384 observations.

3.1 Unit root tests

The rather limited number of observations in both panels of EU countries (825 in the first panel and 384 in the second) does not lend itself to the application of single time series unit root tests. Therefore, we opt to use panel unit root tests, which are more adequate in this case. These tests not only increase the power of unit root tests due to the span of the observations, but also minimise the risks of structural breaks due to possible changes in fiscal regimes.

Among the available panel unit root tests, we choose the Levin et al. (2002) test which may be viewed as a pooled Dickey-Fuller test or as an augmented Dickey-Fuller test when lags are included, and the null hypothesis is the existence of non-stationarity. This test is adequate for heterogeneous panels of moderate size with fixed effects and assumes that there is a common unit root process.

According to the results obtained with the deterministic constant and trend up to 2 lags (see Table III), the existence of the null hypothesis may be rejected at least for some of the considered lags of the variables. The only exception is the ratio, bank assets/bank liabilities but only for the second panel of countries (24 EU members, for the period between Q1 1999 and Q4 2002).

3.2 Estimations and obtained results

Using the series described above, we will estimate the following equation: Equation 1 where, as described before:

LGDP =log of the real GDP per-capita;

LCREDIT =log of the domestic credit;

LFORLIAB =log of the foreign liabilities;

LBMMI =the log of the sum of the bonds and money market instruments;

ASSETS/LIAB =ratio bank assets/bank liabilities; and

CREDIT/DEP =ratio domestic credit/bank deposits.

In our estimations, we first present the results obtained with panel fixed robust estimations and then those obtained with dynamic Arellano-Bond panel GMM one-step and two-step robust estimations.

3.2.1 Results obtained with panel fixed effects robust estimations

We use a panel data approach (following Wooldridge, 2002, 2003), which provides more observations for estimations and reduces the possibility of multi-colinearity among the different variables.

In this case, panel fixed effects estimations are more adequate than random effects estimations, as the two panels include available data for almost all EU countries, in different periods of time (11 countries in the first panel and 24 in the second), rather than data randomly chosen from a larger universe of countries, as is required for the validity of the random estimates. With the fixed-effects estimates, we assume that slopes (β ₁ … β ₈) are common to all the countries, whilst intercepts (α _i) vary across the i countries, assuming differences across groups or time periods.

In Table IV, we present the obtained results with fixed effects robust estimations for the two panels of countries.

Beginning with the first panel of countries, we may accept that the model responds well to the fixed-effects estimations, meaning that in these 11 countries, the real GDP per-capita growth has similar reactions to the explanatory variables. In line with the results of the correlation matrix (Table II), we confirm the clear positive influence of the log of the real domestic credit, the log of the foreign liabilities, the log of the bonds and money market instruments and the ratio, domestic credit/bank deposits, in addition to the negative influence of the ratio, bank assets/bank liabilities.

So, while the relation between the credit provided and the deposits received confirms the effectiveness of the financial institutions in the transformation of their customers' savings into the financing of productive activities, the ratio, bank assets/bank liabilities reveals the well-known difficulties faced by the financial institutions, particularly the banks, in adapting to the new market and global conditions, the efforts to maintain their profits and the innovations in the activities, above all by the introduction of new off-balance-sheet activities, which are more profitable but contribute less to real GDP per-capita growth.

Not surprisingly, the results obtained for the second panel of countries are less consistent than those for the first panel of countries. The differences between the two estimations are clear, not only in the values of the F-test (35.52 in the first panel of countries and only 5.22 in the second), but particularly in the results for the R-squares. We could not expect high R ². since we are dealing with panel estimates, yet the relative homogeneity of the first panel of countries is proved by the similar results of the overall panel R ² and the R ² between (around 0.17) and the R ² within (0.16), meaning that there are no significant differences in the time evolution of each country included in this panel and the cross-country evolution. However, there are clear differences for the second panel of countries, in which the overall panel R ² and the between R ² are around 0.095, while the within R ² is only 0.013, revealing the quite high cross-country heterogeneity in the same period of time.

According to the results reported in Table IV, it is still possible to accept that for the panel of 24 countries between Q1 1999 and Q4 2002, the growth of the real credit and of the real bonds and money market instruments contribute positively to the real GDP per-capita growth. Nevertheless, there is a clear difference in the influence of the log of the foreign liabilities, which reveal the negative dependency and financial liabilities towards foreign creditors, implying the payment of debts and obligations and not contributing positively to the financing of productive activities.

Other symptoms of the huge transformations under the new European and global market conditions and of the integration of the new EU member-states included in the second panel of countries are the influences on real per-capita GDP growth of the two considered ratios. Now the ratio, bank assets/bank liabilities contributes positively while the ratio, domestic credit/bank deposits has a negative influence on GDP growth.

These results confirm the recognised robustness of most EU banking institutions, which have found new ways to maintain profits and a relation between their assets and liabilities which are in line with the real per-capita GDP growth. At the same time, there is a decline of the traditional activities of the banking institutions, that is, the collecting of savings from borrowers to provide the credit to finance investment in productive activities. In many EU countries, there was a strong decline of savings during this period of time, particularly as a reaction to the historically low levels of interest rates, which contribute to high levels of credit but not always to the financing of productive activities.

3.2.2 Results obtained with dynamic Arellano-Bond GMM robust estimations

In addition, we present the results obtained with dynamic Arellano-Bond panel Generalized Method of Moments robust estimators (one-step and two-step difference), following the methodology developed by Arellano and Bond (1991), Blundell and Bond (1998), Windmeijer (2000) and Bond (2002).

These estimations consider the model as a system of equations, one for each time period. The equations differ by their individual moment condition sets, since they all include the endogenous and exogenous variables in first differences as instruments with suitable lags of their own levels. By this use of instruments based on lagged values of the explanatory variables, GMM controls for the potential endogeneity of all explanatory variables, although only for “weak” endogeneity and not for full endogeneity, as explained by Bond (2002).

Although the two-step estimates of the standard errors are asymptotically more efficient than the one-step estimates, most of the applied works using GMM estimators prefer to use the one-step estimator. The explanations point to the quite modest efficiency gains of the two-step estimator, even in the presence of considerable heteroskedascity, as well as to the more important fact that the dependence of the two-step weight matrix makes the usual asymptotic distribution approximation less reliable for the two-step estimation.

Table V reports the obtained results for the two sub-sets of EU countries with dynamic Arellano-Bond one-step and two-step difference robust GMM estimations.

We present the Hansen test for over-identifying restrictions and the Arellano-Bond tests for autocorrelation. In all situations, the Hansen test does not reject the null that the instruments are valid and that they are not correlated with the errors, although for the two-step estimates of the second panel of countries, the result is not so robust. At the same time, according to the results for the Arellano-Bond tests, and as required for the validity of the instruments, we may accept that the residuals are MA (1) and clearly not MA (2).

The obtained results, although statistically less robust than those obtained with fixed-effects robust estimates, confirm the influence of the chosen financial variables on real per-capita GDP growth and the already underlined differences between the two panels of EU countries.

4. Concluding remarks

This paper confirms the influence of financial systems on output growth, as well as the efforts of financial institutions to adapt to the new conditions of the European and global markets in spite of all the differences in the historical evolution and initial conditions among EU member-states.

We contribute to the existing empirical evidence by introducing some financial variables to explain the real per-capita GDP growth, namely, the real domestic credit growth, the real foreign liabilities growth, the real growth of the sum of the bonds and money market instruments and also two ratios: bank assets/bank liabilities and domestic credit/bank deposits. The obtained results, using panel fixed effects and dynamic Arellano-Bond GMM robust estimations, confirm the importance of these variables to the real per-capita GDP growth.

In our estimations, taking into account the availability of quarterly data, we consider two panels of EU countries: one with data from 11 “old” countries, from the beginning of the 1980s until the implementation of the EMU and the other with data from the EMU's inception until the end of 2002 for 24 EU countries, excluding only Luxembourg.

Our estimates show relatively more homogenous results for the first panel, with common slopes, for this group of 11 EU countries. There is a clear positive influence on GDP growth of the log of the real domestic credit, the log of the foreign liabilities, the log of the bonds and money market instruments and the ratio, domestic credit/bank deposits and a negative influence of the ratio, bank assets/bank liabilities. The results for these ratios show the effectiveness of the financial institutions in transforming their customers' savings into the financing of productive activities. In particular, the ratio, bank assets/bank liabilities reveals the well-known difficulties faced by the financial institutions in their efforts to adapt to the new market and global conditions, in addition to their efforts and innovations to maintain profits, particularly by the introduction of new off-balance-sheet activities, which contribute less to real GDP per-capita growth. Even before the EMU, the integration process had already brought about a similar response in output growth to the behaviour of the banking institutions. Nevertheless, in the first panel of EU countries, we still consider different intercepts, which are evidence of the specific initial conditions of these “old” and relatively more homogenous countries.

The results obtained for the second panel, although less homogenous, are still quite consistent. In line with the conclusions for the first panel of countries, the real credit and the real bonds and money market instruments contribute positively to real GDP per-capita growth. The main difference is the now-negative contribution of the foreign liabilities, revealing the increased dependency and financial obligations towards foreign creditors, which imply the payment of debts and obligations and the reduction of the possibilities to finance productive activities.

Other different results for the second panel of EU countries are the influences on real per-capita GDP growth of the two considered ratios. The ratio, bank assets/bank liabilities contribute positively, confirming the robustness of most EU banking institutions, which not only have found new ways to maintain their profits, but also establish a relation between their assets and liabilities which is in line with real per-capita GDP growth. However, the ratio, domestic credit/bank deposits has a negative influence on GDP growth, revealing the decline of the traditional activities of the banking institutions, as they collect smaller amounts of savings from borrowers/customers to support the credit to productive activities. This is also a symptom of the decline of savings in many EU countries, as a reaction to the historically low levels of interest rates during the considered period of time. Our results for this second panel of countries also confirm that in spite of the relative heterogeneity, the differences in their historical evolution and specific initial conditions, these countries have to adapt rapidly to the increasing competition and to the new EU market conditions.

Equation 1