The determinants of banking system soundness: Evidence from selected developed economies

Date of Award


Document Type



Edith Cowan University

Degree Name

Doctor of Philosophy (Integrated)


School of Business and Law

First Supervisor

Robert Powell

Second Supervisor

Anna Golab


Banking system soundness is important because it not only enables countries to withstand the negative effects of financial crises but also is essential for a country’s economic development, financial growth and global competitiveness. Banking system soundness has, therefore, received heightened research interest, particularly following the global financial crisis, which caused significant disruption to international financial markets and led to substantial financial sector losses and bankruptcies. In addition, the COVID-19 pandemic has placed the world economy under pressure as countries struggle to control inflation and central banks are faced with record-high cash rate hikes. This has adversely affected global financial stability. Therefore, it is imperative to determine the factors that influence banking system soundness in order to improve the resilience of banking systems to withstand financial and economic shocks.

This study investigated and identified the determinants of Australia’s, Canada’s, the European Union’s, the United Kingdom’s and the United States’ banking system soundness. The study also investigated and identified the determinants of banking system soundness in a cross-country setting of sound and not-so-sound banking systems. The study used panel data to investigate the impact of regulatory, industry, macroeconomic and internal bank-level variables on banking system soundness (measured by Z-score, distance to default [DD] and CAMELS) using a sample of 32 banks over 17 years from 2004 to 2020. Panel regression analyses were conducted using the fixed effects seemingly unrelated regression model in generalised least square specification. The study also investigated the impact of these variables on banking system soundness during the global financial crisis and the COVID-19 pandemic.

Some of the key findings of this study are that high bank capital is a crucial factor in improving the soundness of each of the countries’ banking systems, whereas large bank size and deposit insurance are associated with the instability of each of the countries’ banking systems. The study also found that various banking system soundness determinants affect different countries’ banking systems differently. Furthermore, the major banking system soundness models (i.e., Z-score, DD and CAMELS) yielded different results, which therefore highlights the importance of not relying on a single model.

This thesis makes various contributions to the banking literature, including providing empirical findings on the determinants of banking system soundness, which help to narrow the knowledge gap in the literature, particularly concerning internal bank-level determinants of banking system soundness. Another key contribution of this thesis is that it provides a comparison of the three major banking system soundness models and a comprehensive discussion of the models’ accuracy in identifying banking system soundness determinants, including during a period of high volatility such as a financial crisis. This can help future researchers select suitable banking system soundness models. The findings of this study have several implications, including helping bank regulators and bank executives – particularly in Australia, Canada, the European Union, the United Kingdom and the United States – to identify the factors influencing the soundness of their banking systems and to develop and implement measures to improve their banking system’s soundness.



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