Banking regulations, financial system stability and trust in the ECB: a structural equation model

Economic Annals-ХХI: Volume 192, Issue 7-8(2), Pages: 148-157

Citation information:
Mursalov, M. (2021). Banking regulations, financial system stability and trust in the ECB: a structural equation model. Economic Annals-XXI, 192(7-8(2)), 148-157. doi:

Muslum Mursalov
PhD (Economics),
Senior Lecturer,
Department of Economic Regulation,
Azerbaijan State University of Economics (UNEC)
6 Istiqlaliyyat Str., Baku, AZ1001, Azerbaijan

Banking regulations, financial system stability and trust in the ECB: a structural equation model

Abstract. Government interventions has long been a question of great interest in a wide range of fields. Scholars have been debating the scope and degree of intervention in the banking sphere that considers government capabilities. This study set out to provide some empirical evidence on the intertwined relationship between government interventions carried out through banking regulations and trust in the European Central Bank (ECB), taking into account the mediating role of financial system stability. A combination of quantitative approaches was used in the data analysis. The confirmatory factor analysis in STATISTICA was applied for hypothesis development, followed by the structural equation modeling (SEM) based on the statistical package SEPATH used for research hypothesis testing.

This study aims to contribute to this growing area of research by exploring that financial system stability mediates the path between banking regulation and trust in central banking.

It was found that stricter government regulatory and supervisory interventions in the banking sphere are changing the imprudent financial institutions’ behavior, however, negatively accomplishing financial development financial markets and institutions. Meanwhile, both financial system stability and banking regulations contribute to trust in the ECB. The research findings add to the growing body of research that indicates that stricter government regulatory and supervisory interventions in the banking sphere drive trust violations in central banking upon the causal chain by virtue of financial development financial markets and institutions deterioration.

Keywords: Banking Regulation; Financial System Stability; Sound Financial System; Trust; European Central Bank; ECB; Basel Committee on Banking Supervision; BCBS

JEL Classification: E32; E71; G41; O16

Acknowledgments and Funding: The author received no direct funding for this research.

Contribution: The author contributed personally to this work.

Data Availability Statement: The initial values used for this research are publicly available on the websites of ECB (Supervisory and prudential statistics):; International Monetary Fund (Financial Development Index):; and OECD:



  1. Albinowski, M., Ciżkowicz, P., & Rzońca, A. (2013). Distrust in the ECB – product of failed crisis prevention or of inappropriate cure? (No. 48242). University Library of Munich, Germany.
  2. Albinowski, M., Ciżkowicz, P., & Rzońca, A. (2014). Links between trust in the ECB and its interest rate policy. Applied Economics, 46(25), 3090-3106.
  3. Aldomy, R. F., Thim, Ch. K., Phuong Lan, N. Th., & Norhashim, M. B. (2020). Bank Concentra­ti­on and Financial Risk in Jordan. Montenegrin Journal of Economics, 16(3), 31-44.
  4. Berggren, N., Daunfeldt, S.-O., & Hellström, J. (2014). Social trust and central-bank independence. European Journal of Political Economy, 34, 425-439.
  5. Brychko, M., Bilan, Y., Lyeonov, S., & Mentel, G. (2020). Trust crisis in the financial sector and macroeconomic stability: a structural equation modelling approach. Economic Research-Ekonomska Istraživanja, 34(1), 828-855.
  6. Brychko, M., Savchenko, T., Vasylieva, T., & Piotrowski, P. (2021). Illegal activities of financial intermediaries: A burden of trust crisis. Journal of International Studies, 14(1), 172-189.
  7. Bryl, Ł. (2020). Long-term Development of National Human Capital. Evidence from China and Poland. Journal of Intercultural Management, 12(3), 30-66.
  8. Buriak, A., Vozňáková, I., Sułkowska, J., & Kryvych, Y. (2019). Social trust and ins­ti­­tutional (bank) trust: Empirical evidence of interaction. Economics and Soci­o­lo­gy, 12(4), 116-129.
  9. Çera, G., Meço, M., Çera, E., & Maloku, S. (2019). The effect of institutional cons­traints and business network on trust in government: An institutional perspec­ti­ve. Administratie si Management Public, 1(33), 6-19.
  10. Chen, Z., Zhu, K., & Yue, C. (2020). Bank heterogeneity, financial regulation, and le­ve­rage procyclicality. Transformations in Business & Economics, 19(2B), 829-849.
  11. Dudchenko, V., Goncharenko, T., Didenko, O., & Olejarz, T. (2020). Banking regu­la­­tion in ensuring bank’s efficiency: Looking through different forms of owner­ship. Journal of International Studies, 13(1), 342-358.
  12. Durcova, J. (2021). The Impact of Interest Rate Transmission Channel on the Prices Development in the Eurozone Countries. Montenegrin Journal of Economics, 17(2), 23-35.
  13. Ehrmann, M., Soudan, M., & Stracca, L. (2013). Explaining European Union Citi­zens’ Trust in the European Central Bank in Normal and Crisis Times. The Scandinavian Journal of Economics, 115(3), 781-807.
  14. Fischer, J. A. V., & Hahn, V. (2008). Determinants of trust in the European Central Bank. SSE/EFI Working Paper Series in Economics and Finance, No. 695.
  15. Folwarski, M. (2018). The impact of selected regulations on the development of payments systems in Poland. Marketing and Management of Innovations, 3, 320-312.
  16. Gavurova, B., Kubak, M., Huculova, E., Popadakova, D., & Bilan, S. (2019). Financial literacy and rationality of youth in Slovakia. Transformations in Business & Economics, 18(3), 43-53.
  17. Gospodarchuk, G., & Suchkova, E. (2019). Financial stability: problems of inter-le­vel and cross-sectoral equilibrium. Equilibrium. Quarterly Journal of Econo­mics and Economic Policy, 14(1), 53-79.
  18. Gulaliyev, M. G., Ashurbayli-Huseynova, N. P., Gubadova, A. A., Mammadova, G. M., Jafarova, R. T., & Ahmedov, B. N. (2019). Stability of the Banking Sector: Deriving Stability Indicators and Stress-Testing. Polish Journal of Manage­ment Studies, 19(2), 182-195.
  19. Hooper, D., Coughlan, J., & Mullen, M. (2008). Structural equation modelling: Gui­de­lines for determining model fit. Electronic Journal of Business Research Me­thods, 6(1).
  20. Horvath, R., & Katuscakova, D. (2016). Transparency and trust: the case of the Euro­pe­an Central Bank. Applied Economics, 57(48), 5625-5638.
  21. Ijaz, Sh., Hassan, A., Tarazi, A., & Fraz, A. (2020). Linking bank competition, financi­al stability, and economic growth. Journal of Business Economics and Mana­ge­ment, 21(1), 200-221.
  22. Innocent, I. O., Ademola, O. G., & Teryima, T. S. (2019). Effect of Capital Adequa­cy, Credit Risk and Operating Efficiency on the performance of Commercial Banks in Nigeria. Financial Markets, Institutions and Risks, 3(1), 92-114.
  23. Islam, Sh. T., & Khan, M. Y. H. (2019). Evaluating the changes in the European Banking Regulation – MiFID and its possible effects on the Global Economy: A Theoretical Study. Financial Markets, Institutions and Risks, 4(3), 24-31.
  24. Jiang, Y., & Wang, G. (2017). Monetary policy surprises and the responses of asset prices: An event study. SocioEconomic Challenges, 3(1), 22-44.
  25. Ključnikov, A., Civelek, M., Polách, J., Mikoláš, Z., & Banot, M. (2020). How do se­cu­rity and benefits instill trustworthiness of a digital local currency? Oeco­no­mia Copernicana, 11(3), 433-465.
  26. Korcsmáros, E., Machová, R., Šeben, Z., & Feher, L. (2019). Changing in Consumer Loyalty as a Reaction for EU Integration in Slovakia. Marketing and Manage­ment of Innovations, 2, 206-216.
  27. Korzeb, Z., & Niedziółka, P. (2020). Resistance of commercial banks to the crisis caused by the COVID-19 pandemic: the case of Poland. Equilibrium. Quarterly Journal of Economics and Economic Policy, 15(2), 205-234.
  28. Kremen, V. M., Brychko, М. М., & Kremen, О. І. (2018). Scientific approach to assessing the independence of financial supervision. Financial and credit activity: problems of theory and practice, 1(2), 383-391.
  29. Kusuma, L., Rejeki, S., Robiyanto, R., & Irviana, L. (2020). Reputation system of C2C e-commerce, buying interest and trust. Business: Theory and Practice, 21(1), 314-321.
  30. Lentner, Cs., Vasa, L., Kolozsi, P. P., & Zéman, Z. (2019). New dimensions of internal controls in banking after the GFC. Economic Annals-XXI, 176(3-4), 38-48.
  31. Merrouche, O., & Nier, E. (2010). What Caused the Global Financial Crisis: Eviden­ceon the Drivers of Financial Imbalances 1999: 2007. IMF Working Papers, 10(265), 1.
  32. Murshudli, F., Zapotichna, R., & Dilbazi, E. (2020). International banking business and bank strategy: global trends and benchmarks for post-Soviet states. Economic Annals-XXI, 185(9-10), 27-38.
  33. Naser, N. (2019). A Comprehensive Analysis of European Banking Soundness – Theoretical Study. Financial Markets, Institutions and Risks, 3(2), 17-43.
  34. Pažický, M. (2018). The consequences of unconventional monetary policy in euro area in times of monetary easing. Oeconomia Copernicana, 9(4), 581-615.
  35. Purwono, R., & Dimayanti, A. U. R. (2020). The effect of internal banking and macro­eco­nomic variables on systemic risk. Polish Journal of Management Studies, 21(2), 315-327.
  36. Roth, F., Gros, D., & Nowak-Lehmann, D. F. (2014). Crisis and Citizens’ Trust in the European Cen­­tral Bank – Panel Data Evidence for the Euro Area, 1999-2012. Journal of European Integration, 36(3), 303-320.
  37. Roth, F., Gros, D., & Nowak-Lehmann, F. (2012). Has the Financial Crisis Eroded Citizens’ Trust in the European Central Bank? Panel Data Evidence for the Euro Area 1999-2011. Cege Discussion Papers No. 124. University of Göttingen, Center for European, Governance and Economic Development Research (cege), Göttingen.
  38. Rybaczewska, M., Chesire, B. J., & Sparks, L. (2020). YouTube Vloggers as Brand Influencers on Consumer Purchase Behaviour. Journal of Intercultural Management, 12(3), 117-140.
  39. Ryciuk, U., & Nazarko, J. (2020). Model of trust-based cooperative relationships in a supply chain. Journal of Business Economics and Management, 21(5), 1225-1247.
  40. Sági, J., Vasa, L., & Lentner, Cs. (2020). Innovative solutions in the development of households’ financial awareness: A Hungarian example. Economics and Sociology, 13(3), 27-45.
  41. Sahay, R., Cihak, M., N’Diaye, P. M., Barajas, A., Ayala Pena, D. B., Bi, R. Gao, Y., Kyobe, A. J., Nguyen, L., Saborowski, Ch., Svirydzenka, K., & Yousefi, S. R. (2015). Ret­hinking Financial Deepening: Stability and Growth in Emerging Markets. Staff Discussion Notes, 2015(8).
  42. Salé, M. J., Muharremi, O., & Hoxhaj, M. (2021). Albanian Individual Taxpayers Per­cep­tions and Determinants on Ethical Behavior Regarding Tax Compliance. Business Ethics and Leadership, 5(1), 66-80.
  43. Steiger, J. H. (2007). Understanding the limitations of global fit assessment in struc­tu­ral equation modeling. Personality and Individual Differences, 42(5), 893-898.
  44. Suifan, T. S. (2019). The effects of work environmental factors on job satisfaction: The mediating role of work motivation. Business: Theory and Practice, 20, 456-466.
  45. Svirydzenka, K. (2016). Introducing a New Broad-based Index of Financial Develop­ment. IMF Working Papers, 2016, 005. International Monetary Fund.
  46. Sysoyeva, L., & Buriak, A. (2014). Development prerequisites for the regulatory app­ro­­aches of the systemic risk regulation in finances. Economic Annals-XXI, 1-2(2), 20-23. (in Ukr.)

Received 4.05.2021
Received in revised form 14.06.2021
Accepted 20.06.2021
Available online 21.09.2021