The Determinants of Financial Instability in Emerging Countries

Abstract

Financial integration has greatly contributed to economic growth and development around the globe, in particular for developing countries. However, this process of financial integration has also provided threats in the form of instability which threaten the progress of economic growth and development. The objective of this study is to examine a set of indicators which are valid and indicative of financial instability in the case of developing countries. A panel data of 17 developing countries during the period 2000–2017 is utilized. The credit growth is used as a proxy of financial instability. Standard methods such as the pooled OLS, fixed effect model and random effect model are considered to ensure robustness. Empirical findings from this study indicate that the key determinants of financial instability in developing countries including Vietnam include the GDP growth rate, inflation rate, the growth rate of base money, the change in foreign exchange reserves, lending interest rate, returns in the stock market and the return on equity ratio of the banking sector. Findings from this study appear to support the views of Post-Keynesians in relation to the mechanism leading to financial instability, in particular for developing markets.

Role of social sustainability for financial inclusion and stability among Asian countries

“…The dependent variable of FS consists of bank z -score (FST1), which is considered an unbiased indicator measuring the risk faced by banks, their probability of default and the capacity of the banking system to absorb shock (Ahamed and Mallick, 2019; Lepetit et al. , 2021; Vo et al. , 2019).…”

“…The dependent variable of FS consists of bank z-score (FST1), which is considered an unbiased indicator measuring the risk faced by banks, their probability of default and the capacity of the banking system to absorb shock (Ahamed and Mallick, 2019;Lepetit et al, 2021;Vo et al, 2019). Furthermore, Bank credit to bank deposits (FST2) and Liquid assets to deposits and short-term funding (FST3) were also included in the category of FS.…”

“…, 2018). Analyzing the global financial crisis, it is implied that increasing financial integration in the world pulls in the risk of spillover effects on FS (Vo et al. , 2019) of Asia.…”

“…Financial stability (FS) in the financial sector is one of the principal objectives for policymakers and administrative authorities worldwide. The financial sector ascertains effective capital mobilization amongst borrowers and lenders, along with the use of capital in productive ventures in order to boost the economy which would result in bringing about FS (Vo et al, 2019). Thus, the sustenance of FS in the long run highly depends upon the development of the financial sector.…”

“…Asia is the largest and most populous region globally, with expeditious economic growth, showing an expected GDP growth of 6.3% (Bhardwaj et al, 2018). Analyzing the global financial crisis, it is implied that increasing financial integration in the world pulls in the risk of spillover effects on FS (Vo et al, 2019) of Asia. Moreover, Asia is also home to most of the poor population in the world (ADB, 2017).…”