The Governance Profile of European Countries and Key Banking Indicators – A Causality Analysis

The study documents a significant relationship in terms of causality between country-level governance indicators (as a component of ESG) and main banking system indicators by relying on a sample of European Union countries that exhibit a temperate climate profile. Granger causality test is used to assess the link between banking system and country governance, in terms of a cause-effect framework. The findings show that the influence of country governance performance on banking activity is most pronounced in Belgium, Portugal, and Spain while in the Netherlands, France, Greece, and Italy the interplay is relatively balanced. Banking system indicators that appear to precede changes in governance ones in most countries are related to bank credit to bank deposits, bank deposits to GDP, and bank non-performing loans to gross loans. Bilateral causality is present mostly in Greece and Spain, the control of corruption and bank non-performing loans being the variables most often included in the causal link.