The Impact of Factors Affecting on Financial Stability in Selected Developing Countries: A Panel Data Approach

The occurrence of financial crises in recent years around the world has raised many concerns about the stability of the financial system in the economies of developing countries. Stabilizing financial stability is the main goal of the Central Bank of countries. Financial stability refers to a situation in which the financial system is functioning properly and companies and individuals are confident that it is functioning properly. Factors determining financial stability can be divided into two groups: the first group, internal factors related to bank management and the second group, which are macroeconomic variables. In this study, using global experiences and panel data of 25 selected developing countries during the years 2001 to 2019 and using the principal component analysis method (PCA), the combined index of financial stability has been calculated. Then, using the generalized torque model (GMM), the effect of financial and commercial liberalization on the combined index of financial stability has been investigated. The results show the negative effect of financial and trade liberalization on the combined index of financial stability. In other words, the interaction of countries' financial markets with each other, causes liquidity shifts and fluctuations in their financial markets. In this regard, using the Financial Stability Index to measure the effectiveness of governments in reducing the impact of financial crises can be useful.