The relationship between financial development and economic growth during the recent crisis: Evidence from the EU.

Highlights • Outside the crisis period financial development promotes economic growth, while during the crisis it has an adverse effect on economic activity. • During the recent sub-prime crises the capital adequacy of banks promoted the stability the financial system. • The degree of international trade openness in the economy of a country was the primary factor that led growth during both crisis periods. • Further investigation on the unconventional financial development measures that lead to economic growth after the crisis is required. Abstract This paper aims to examine the relationship between financial development and economic growth on the face of the recent financial crisis, using a panel dataset of 26 European Union countries over the period 1990–2016. The empirical approach uses multiplicative dummies to compare two distinct sub-periods before/after the crisis. The results show that before crisis, financial development promoted economic growth, while after the crisis it hindered economic activity. Also, the findings suggest that during the years 2008 and 2009 the capital adequacy of banks protected depositors and promoted the stability of the financial system. [ABSTRACT FROM AUTHOR]