Essays on Financial Development

Abstract

The impact of financial development on economic growth has been studied in the past few decades. However, the empirical findings range from having a positive effect on economic growth in early studies to no impact or even negative effect in the last decade. Therefore, this thesis contributes to the finance-growth nexus by re-examining the relationship using different
dimensions of financial development, namely financial stability, financial crises, and financial structure. This thesis is comprised of three empirical chapters.

The first empirical study examines the impact of natural disasters on banking stability. Given that the effects of natural disasters on banking stability differ across the level of economic development, this study focuses on these heterogeneous effects. We combine two different datasets. The first utilises bank-level data comprising 1,242 banks across 72 countries, and the
second uses the natural disasters dataset provided by the Centre for Research on the Epidemiology of Disasters (CRED). We estimate our models by employing a panel regression estimator with the bank and year-fixed effects. The results suggest that natural disasters significantly affect the distance-to-default (Z-score), which is our measure of banks’ stability,
especially for middle-and low-income countries. The results also indicate that natural disasters adversely affect non-performing loans, return on assets, and capital ratios of banks.

The second empirical study examines the impact of banking, currency and debt crises on economic growth and its volatility. Financial crises often have a devastating impact on living standards. However, there needs to be more evidence about their effects in Africa, a vastly underdeveloped region. We empirically estimate a growth equation using both fixed effects and System GMM estimations. Using data from 1970 to 2017 for 52 African countries, we find that only currency and debt crises affect economic growth negatively in Africa. On the other hand, banking crises are shown to have a statistically insignificant effect on growth in Africa. Currency crises may reduce economic growth in the long run by 1.19 percentage points, and
debt crises are the most harmful, reducing long-run growth by three percentage points.

The third empirical study investigates the relationship between financial structure and economic growth. There is inconclusive empirical evidence regarding the importance of financial structure and whether a market or bank-based financial system contributes to economic growth. Consequently, we contribute to the literature by re-examining the relationship based on a broader sample and more recent data. Our sample includes 84 countries
and covers the period from 1960 to 2019. The results of our study indicate that the banking sector is no longer an essential source of growth promotion in the last two decades. Moreover, according to some of our analyses, economic growth is negatively impacted by the increased development of the banking sector. In contrast, from 2000 to 2019, the stock market consistently and significantly contributed to economic growth.

Date of Award	May 2023
Original language	English
Supervisor	Sajid Chaudhry (Supervisor) & Johan Rewilak (Supervisor)