Impact of financial crisis on soundness of European banking systems according to the level of financial development

Abstract

The consequences of the global financial crisis differ among the EU members, not only because of structural deficiencies accumulated by some of them but also due to the lack of macroprudential supervision and regulatory mechanisms. Using macroprudential indicators issued by the IMF and developing an aggregate financial stability index, this paper examines the ability of these indicators to detect differences in the level of soundness of European banking systems according to the levels of their financial development. The analysis reveals statistically significant differences for the indicators of asset quality, capital adequacy and banking sector profitability. Furthermore, the results show greater financial vulnerability during the crisis in financially more developed countries.