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Innovation and Bank Capital Adequacy: An Empirical Assessment across European Economies

Author

Listed:
  • Massimo Arnone

    (Unict - Università degli studi di Catania = University of Catania)

  • Alberto Costantiello

    (LUM - Università LUM Giuseppe Degennaro = University Giuseppe Degennaro)

  • Carlo Drago

    (UNICUSANO - University Niccolò Cusano = Università Niccoló Cusano)

  • Angelo Leogrande

    (LUM - Università LUM Giuseppe Degennaro = University Giuseppe Degennaro)

Abstract

This paper explores the connection between innovation dynamics and the Bank Capital to Asset Ratio (CAR) in the context of 39 European nations from 2018 to 2025. With a multidimensional panel data approach that incorporates a combination of static and dynamic panel models and machine learning algorithms-specifically Decision Tree Regression-the study conducts a data-oriented analysis of the impact of various types of innovation on the resilience of the banking sector. The study differentiates innovation inputs (e.g., trademark applications, innovator share), outputs (e.g., new-tomarketing and new-to-firm product sales), and productivity factors and factors permitting a finely grained comprehension of innovation inputs and financial consequences. Cluster analysis is applied to classify countries into innovation performance groups and is followed by regression and variable importance calculations. The study identifies that process innovations executed by small and medium enterprises (SMEs) are positively linked with CAR and that information is associated with greater financial stability, whereas innovation outputs and productivity indicators at times relate inversely and register corresponding financial stress in the face of innovation-driven transitions. Further, prestage innovation inputs may raise banks' uncertainty and register systematic risk escalation. The model of a Decision Tree also reveals the sales of innovative products and labor productivity to be the most robust determinants of CAR with varied directional impacts between them. These results document the innovation-finance nexus complexity and refute the supposition that innovation equally strengthens economic prudence. The study contributes new knowledge to the literature through the combination of the assessment of financial prudency with the type of innovation and provides clear policy directions for the synchronization of innovation strategies with macroprudency aims across the European region.

Suggested Citation

  • Massimo Arnone & Alberto Costantiello & Carlo Drago & Angelo Leogrande, 2025. "Innovation and Bank Capital Adequacy: An Empirical Assessment across European Economies," Working Papers hal-05231617, HAL.
    • Handle: RePEc:hal:wpaper:hal-05231617
    Note: View the original document on HAL open archive server: https://hal.science/hal-05231617v1
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    References listed on IDEAS

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    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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