Nexus of Public Debt and Banking Stability, What Role for Governance: Evidence from Panel Data estimations for WAEMU’s Banking System

Abstract

Abstract This paper aims to highlight the mediating role of state governance’s quality in public debt effects on banking stability using a sample of 106 banks in the WAEMU area from 2013 to 2019. The results from using the system GMM estimator and a quantile regression with a non-addictive fixed effects approach (QRPD) show that the effect of public debt on banking stability is non-linear and depends on the level of governance. Governance quality mitigates the adverse effect of public debt on banking stability. A governance threshold is identified, showing a minimum level of good quality of governance from which public debt begins enhancing banking stability. We conclude by encouraging the WAEMU countries to significantly improve the quality of governance if they want public debt to promote banking stability. JEL Classification : C23, G21, H63.