Stability of the banking system as a key condition for the financial security of the national economy

Abstract

Abstract: Purpose. This article is aimed at analyzing the systemic importance of the resilience of the banking sector to influence the macro-financial sustainability under the circumstances of the increase in the economic uncertainty. The paper relates to the lack of the empirical incorporation of banking stability in the national financial risk assessment and policy development models. Methods. The study uses a dynamic panel economics model using the System GMM estimator which allows the researcher to control the endogeneity, persistence effects, and unobserved heterogeneity. The analysis is based on secondary macro-financial and institutional data of Ukraine, Poland, and Germany, 2020-2024. The banking industry resilience is indicated by the composite index of capitalization, the quality of assets, liquidity and profitability and leverage. The concept of macro-financial sustainability is measured with the help of an aggregate indicator that includes fiscal, monetary, and external stability. The model features macroeconomic variables and institutional control variables with an attempt to isolate transmission mechanisms. Results. The statistical findings indicate that there is a statistically significant and positive correlation between the resilience of the banking sector and macro financial sustainability of all countries being observed. The estimated coefficients imply that one unit of enhancements in the banking resilience leads to the increase in macro-financial sustainability by about 0.25-0.31 units and higher in shock-exposed and transition economies. Financial sustainability shows high persistence, which proves delayed adaptation to the shocks of the system. The destabilizing effect of inflationary pressures and exchange rate volatility have consistent effects with the stabilizing effect of the banking sector being enhanced by institutional quality. The comparison across countries shows that there is a larger influence of banking sector based on the maturity of the institutions and access to other fiscal stabilizers. Conclusions. The results affirm the banking sector resilience is a vital systemic state of ensuring macro-financial stability, especially in times of concomitant economic and geopolitical shocks. Enhancing the prudential monitoring, bettering the quality of assets, and enhancing institutional governance become the crucial policy priorities. The research is relevant to financial economics since it places the banking resilience as an essential macro-level stabilizing process, as opposed to a sectoral phenomenon. Future studies need to broaden their analytical horizon, use micro-level banking data, and implement nonlinear models of crisis to understand the dynamics of asymmetric crises.