Banking stability determinants: evidence from Portugal

This paper aims to assess banking stability and its determinants in Portugal during the period of 2010-2019. The empirical study starts with the construction of an index, which reflects the aggregated banking stability index (ABSI), using financial soundness indicators (FSI) over the period of 2010-2019, on a quarterly basis. The ABSI is then used as the dependent variable to assess the determinants of the Portuguese banking stability. The independent variables were classified into macroeconomic and financial variables, respectively, and the ARMA conditional least square method was considered. The findings suggest an improvement in stability since 2017, and point to significant macroeconomic early warning indicators, such as the growth rate of the consumer price index (%& UDelta;CPI), as well as financial ones, such as the ratio of the second money multiplier (M2) to gross domestic product (GDP). This paper contributes to the banking stability literature by examining the Portuguese case for the first time. The results put in evidence that both macroeconomic and financial indicators can be useful predictors of banking instability.