Banking soundness-financial stability nexus: empirical evidence from Jordan


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The main purpose of this study is to investigate the relationship between financial stability and banking soundness in Jordan. For this purpose, the study mainly uses the FMOLS approach in addition to other analysis techniques and tools. The outcomes of the descriptive analysis show that the Jordanian financial system seems stable, and the indicators of banking soundness signal a steady and solid banking sector. The cointegration tests indicate that the considered variables have a long-term equilibrium relationship; the variables move together in the long term. The empirical results reveal that the majority of the banking soundness indicators have a positive impact on financial stability. This asserts that a sound banking sector plays a vital role in maintaining a stable financial system. However, the findings also indicate that a steady interest rate policy is one of the significant requirements for sustaining the stability of financial systems. Moreover, the response of financial stability with respect to economic growth changes is found to be positive and relatively high. On the fact of the importance of the topic under study, since financial stability is one of the major concerns of the authority bodies, the empirical findings can have very important policy implications for decision-makers.

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    • Table 1. Descriptive statistics
    • Table 2. Series stationary testing with the ADF test
    • Table 3. Cointegration tests and VIF analysis results
    • Table 4. Regression estimates of the FMOLS approach
    • Conceptualization
      Hamed Ahmad Almahadin, Thair Kaddumi, Qais AL-Kilani
    • Data curation
      Hamed Ahmad Almahadin, Thair Kaddumi
    • Formal Analysis
      Hamed Ahmad Almahadin, Qais AL-Kilani
    • Investigation
      Hamed Ahmad Almahadin
    • Methodology
      Hamed Ahmad Almahadin, Thair Kaddumi, Qais AL-Kilani
    • Project administration
      Hamed Ahmad Almahadin
    • Supervision
      Hamed Ahmad Almahadin
    • Validation
      Hamed Ahmad Almahadin, Thair Kaddumi, Qais AL-Kilani
    • Visualization
      Hamed Ahmad Almahadin, Thair Kaddumi, Qais AL-Kilani
    • Writing – original draft
      Hamed Ahmad Almahadin
    • Resources
      Thair Kaddumi, Qais AL-Kilani
    • Writing – review & editing
      Thair Kaddumi, Qais AL-Kilani