Banking Sector Development and Economic Growth in Central and Southeastern Europe Countries

The aim of this paper is to empirically examine the relationship between banking sector development and economic growth in 16 transition countries in Central and Southeastern Europe in the period from 1995 to 2010. We apply fixed-effects panel model and control for other relevant determinants of economic growth and endogeneity. We measure the level of banking sector development using the amount of bank credit allocated to the private sector as a share of GDP. The second variable for the level of financial sector development is the margin between lending and deposit interest rates. According to our results the amount of bank credit allocated to the private sector, apparently does not speed up economic growth in transition countries. The second variable, interest rate margin is negatively but not significantly associated with economic growth.