Banking regulations, financial system stability and trust in the ECB: a structural equation model

Abstract

Government interventions has long been a question of great interest in a wide range of fields. Scholars have been debating the scope and degree of intervention in the banking sphere that considers government capabilities. This study set out to provide some empirical evidence on the intertwined relationship between government interventions carried out through banking regulations and trust in the European Central Bank (ECB), taking into account the mediating role of financial system stability. A combination of quantitative approaches was used in the data analysis. The confirmatory factor analysis in STATISTICA was applied for hypothesis development, followed by the structural equation modeling (SEM) based on the statistical package SEPATH used for research hypothesis testing. This study aims to contribute to this growing area of research by exploring that financial system stability mediates the path between banking regulation and trust in central banking. It was found that stricter government regulatory and supervisory interventions in the banking sphere are changing the imprudent financial institutions’ behavior, however, negatively accomplishing financial development financial markets and institutions. Meanwhile, both financial system stability and banking regulations contribute to trust in the ECB. The research findings add to the growing body of research that indicates that stricter government regulatory and supervisory interventions in the banking sphere drive trust violations in central banking upon the causal chain by virtue of financial development financial markets and institutions deterioration.