Variable

Description

Measures and definition

Expected effect

Dependent variable

Banking stability (BS)

It refers to the ability of a banking system to facilitate and enhance economic processes, manage risks, absorb shocks

$\text{Zscore}=\frac{\left(\text{ROA}+\text{EA}\right)}{\sigma \left(\text{ROA}\right)}$

Independent variables

Macroeconomic (ME)

It refers to economic indicators at the country level and the extent of their impact on the economic cycle and financial systems, determined by the flexibility of policies and procedures in the country and the control of fiscal and monetary policy, which is reflected on the financial stability of the banking system.

Gross Domestic Product Growth (GDP): Annual percentage growth rate of GDP at market prices based on constant local currency. Aggregates are based on constant 2010 U.S. dollars.

Exchange rate (ER): Local currency units per U.S. dollar.

GDP: Positive

ER: ?

Governance and Institutions (GI)

This variable measures the performance of governments, using indicators of governance and institutional quality. It implies the ability of governments to create high-quality institutional environment that can facilitate the financial stability of the banking system.

Political stability index (PS): Perceptions of the likelihood that the government will be destabilized or overthrown by unconstitutional or violent means, including politically-motivated violence and terrorism.

The index is a composite measure as it is based on several other indexes from multiple sources including the Economist Intelligence Unit, the World Economic Forum, and the Political Risk Services, among others. The underlying indexes reflect the likelihood of a disorderly transfer of government power, armed conflict, violent demonstrations, social unrest, international tensions, terrorism, as well as ethnic, religious or regional conflicts

Regulatory quality index (RQ): Perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development.

Many variables are used in the contruction of this index, such as price controls, discriminatory tariffs, extent of market dominance, regulatory burden, tax inconsistency, trade policy, business regulatory environment, market organization, etc. There are from different data sources (World Economic Forum Global Competitiveness Report, Global Integrity Index, Varieties of Democracy Project, World Bank Country Policy and Institutional Assessments, etc.).

PS: Positive

RQ: ?

Banking system (BS)

It refers to internal indicators of the banking sector that contribute to its efficiency, which in turn will be reflected on its financial stability.

Bank lending-deposit interest rate spread (BLIS): Difference between the lending rate and the deposit rate. The lending rate is the rate charged by banks on loans to the private sector and the deposit interest rate is the rate offered by commercial banks on three-month deposits.

BLIS: Negative