Reflecting on the Recent Banking Crisis, What Are the New Financial Stability Determinants?

Abstract

Little attention has been paid to the role of inflation and financial inclusion in influencing financial stability. These factors have become all the more important in light of the recent banking crisis in the United States. The lessons learnt from the recent banking crisis have heightened the need for financial regulators and bank supervisors to undertake a continuous search for the nontraditional determinants of financial stability to identify risks early and mitigate risks to financial system stability. In this article, we examine some nontraditional determinants of financial stability using data from 61 countries from 2009 to 2021. The first‐difference panel GMM regression method was used to estimate the model, and we find that greater financial stability in the previous period is followed by greater financial stability in the subsequent period in all regions, signalling the persistence of financial stability. The loan‐to‐deposit ratio improves financial stability in European and Americas countries, while countries that have a high level of financial inclusion, and whose banking sector has a high loan‐to‐deposit ratio, are more financially stable. Financial inclusion improves financial stability in high inflation environments particularly in African and Americas countries. High levels of financial inclusion impair financial stability during a recession particularly in Asian countries. African banks with a high loan‐to‐deposit ratio are more financially stable during a recession. Also, Americas and African countries that have a combined high financial inclusion and inflation rates and whose banking sector has a high loan‐to‐deposit ratio are less financially stable, indicating that high inflation hinders financial inclusion and loan‐to‐deposit ratio from improving financial stability.