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: https://doi.org/10.21003/ea.V192-12

Muslum Mursalov
PhD (Economics),
Senior Lecturer,
Department of Economic Regulation,
Azerbaijan State University of Economics (UNEC)
6 Istiqlaliyyat Str., Baku, AZ1001, Azerbaijan
muslum-murselov@mail.ru
ORCID ID: https://orcid.org/0000-0003-4174-8093

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): https://sdw.ecb.europa.eu/browse.do?node=9691103; International Monetary Fund (Financial Development Index): https://data.imf.org/?sk=F8032E80-B36C-43B1-AC26-493C5B1CD33B&sId=1481126573525; and OECD: https://stats.oecd.org

DOI: https://doi.org/10.21003/ea.V192-12

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