Banking Stability Index: A Cross-Country Study

Successful development of economy is based on the effective and stable performance of credit institutions, mainly banks. This paper discusses some of the existing efforts to construct an aggregate financial stability index and brings attempts to construct an aggregate Banking Stability Index (BSI), taking into account indicators of financial strength of banks (performance and capital adequacy) and major risks (credit and liquidity risk) affecting banks in the banking system. An aggregate BSI is then used for evaluation of stability in the European Union (EU) countries, focusing on ten countries that joined EU in 2004. Results showed that in 2014 countries with the most stable banking sectors were Luxembourg and Estonia. On the opposite end of the scale were banking sectors in Spain, Portugal, and Greece. The outcome of the study showed decline of the average banking stability in EU countries during the period of 2005-2008, and its improvement since 2009. The improvement in last years was positively affected mainly by development of the capital adequacy. Results also showed that the countries that joined EU in 2004 were positively affected by accession to EU what is evidenced by the value of BSI, which increased between the years 2004 and 2014.