Bank Stability and Economic Growth: Panel Evidence from the Covid-19 Pandemic

Abstract

This study aims to investigate the relationship between bank stability and economic growth, and in particular if it changes during the early stages of the Covid-19 pandemic. This is investigated by means of a panel data study of 24 EU countries between 2006-2020, utilizing a fixed effects model. The results show that bank stability has a positive relationship with economic growth if bank stability is measured with the non-performing loans ratio. However, no such conclusion can be drawn when using bank Z-score, due to statistical insignificance. Additionally, further research is needed to say anything definite about the causality and direction of the found effect. This study adds to the existing literature concerning the relationship in recent years, as well as contributes new findings. The main new finding is that the magnitude of the relationship between non-performing loans ratio and GDP growth is larger during the early stages of the Covid-19 pandemic.