Determinants of Banking Stability: Evidence from Haiti’s Banking System

Abstract

This paper investigates the factors of the banking stability in Haiti, over the period of 1996 to 2017, using macroeconomic, government and institutions, banking system, and economic freedom factors measured respectively by GDP growth and exchange rate, political stability index and regulatory quality index, bank lending-deposit interest rate spread, property rights index and investment freedom index. To carry out the analysis, the yearly data have been transformed into quarterly data, giving a sample of 88 observations. By means of OLS regressions, six statistical models have been specified. Banking stability which is the response variable is measured by the z-score. The results suggest that macroeconomic and economic freedom factors have positive effects on the banking stability, while the banking system factor impacts negatively the banking stability in Haiti. Conversely, government and institutions factor has no significant impact on the Haitian banking stability. When it comes to assess the impact of each explanatory variable (GDP growth, exchange rate, political stability index, regulatory quality index, bank lending- deposit interest rate spread, property rights index and investment freedom index) on banking stability, the results show that they all have significant effects on the Haitian banking stability. However, when all of the independent variables are analyzed in one multiple regression together, the political stability index is not statistically significant. The findings of this study have important implications for decision makers. Governments and the Central Bank should intensity their efforts in creating a promising macroeconomic environment, adopting effective monetary policy, reducing restrictions in investment and reinforcing laws to protect property rights, in order to maintain or improve banking stability in Haiti.