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Credit, banking fragility, and economic performance

Author

Listed:
  • Jérôme Creel

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Paul Hubert

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Fabien Labondance

    (CRESE - Centre de REcherches sur les Stratégies Economiques (UR 3190) - UFC - Université de Franche-Comté - UBFC - Université Bourgogne Franche-Comté [COMUE])

Abstract

This article explores the role of banking fragility for the relationship between private credit and economic growth and bridges two literatures, one on the link between credit and economic growth and the other on the effects of banking fragility on credit dynamics. We consider two types of banking fragility on both the asset and liability sides: nonperforming loans and the ratio of bank capital to assets. Using a standard growth model framework and a dynamic generalized method of moment panel estimator on data for European Union countries, we find that banking fragility has a negative effect on economic growth. A consequence of considering banking fragility is that credit appears to have a positive effect on economic growth only when banking fragility is relatively low.

Suggested Citation

  • Jérôme Creel & Paul Hubert & Fabien Labondance, 2023. "Credit, banking fragility, and economic performance," Sciences Po Economics Publications (main) hal-04523669, HAL.
    • Handle: RePEc:hal:spmain:hal-04523669
    DOI: 10.1093/oep/gpac013
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    Cited by:

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    2. Luo, Yan & Jiang, Chuyu & Jun, Xiao & Zhao, Yang, 2025. "Does investment in consumer finance companies impact credit allocation of banks? Evidence from China," Economic Modelling, Elsevier, vol. 150(C).
    3. Valenzuela, Patricio, 2025. "Corporate credit ratings, banking fragility, and sovereign credit risk," Finance Research Letters, Elsevier, vol. 82(C).
    4. Li, Zhinan & Ren, Yaqi & Shen, Peilong & Zhang, Can, 2025. "Does textual risk information from individual banks exacerbate systemic risk? Evidence from the Chinese banking system," Economic Modelling, Elsevier, vol. 152(C).
    5. Sengupta, Rajeswari & Vardhan, Harsh & Verma, Akhilesh, 2025. "Bank capital and monetary policy transmission: Analyzing the central bank’s dilemma," Economic Modelling, Elsevier, vol. 152(C).
    6. Liang, Shuzhen & Ye, Yongwei & Zhang, Ruifeng, 2025. "Social credit system and the alleviation of investment–financing maturity mismatch in China," Economic Analysis and Policy, Elsevier, vol. 87(C), pages 1415-1435.
    7. Feng, Jue & Jiao, Wenniu & Wang, Yingdong, 2025. "Bank fintech and lending distance: The role of information asymmetry and risk management channels," Economic Modelling, Elsevier, vol. 151(C).
    8. Wu, Xinhong & Wu, Xinmei, 2025. "How does bank digitalization benefit firm borrowing? Evidence from China," Economic Modelling, Elsevier, vol. 153(C).
    9. Mustafa Okur & Ali Köse & Özgür Akpinar, 2021. "The Soundness of Financial Institutions In The Fragile Five Countries," International Journal of Business Research and Management (IJBRM), Computer Science Journals (CSC Journals), vol. 12(3), pages 89-102, June.
    10. Zeeshan, Mohammad & Singh, Manish K., 2025. "Sectoral exposure and its impact on bank risk: Evidence from India," Economic Modelling, Elsevier, vol. 151(C).

    More about this item

    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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