The impact of the banking sector on economic growth in Poland – an econometric analysis

The paper analyses the impact of the banking sector on economic growth in Poland. The aim of the paper was to analyse if the banking sector has a significant effect on economic growth in the case of Poland. Hence, the following hypothesis was formulated: there is a statistically significant relation between the development of the banking sector and economic growth in Poland. On the basis of the applied econometric methods, it has been possible to demonstrate that the banking sector’s development has an economically and statistically significant impact on economic growth in Poland.


Introduction
The issue of relations between financial development (of financial markets) and economic growth is not new to economics or finances. It emerged as early as J. Schumpeter's work (1960). He pointed to a major significance of finance to the stimulation of economic growth and development. J. Schumpeter's ideas were taken up by R. King and R. Levine (1993), who intensified the discussion. R. Levine defined financial development, too, stating: 'Financial development occurs when financial instruments, markets, and intermediaries ameliorate -though do not necessarily eliminatethe effects of information, enforcement, and transactions costs and therefore do a correspondingly better job at providing the five financial functions. Thus, financial development involves improvements in the (i) production of ex ante information about possible investments, (ii) monitoring of investments and implementation of corporate governance, (iii) trading, diversification, and management of risk, (iv) mobilization and pooling of savings, and (v) exchange of goods and services. Each of these financial functions may influence savings and investment decisions and hence economic growth. Since many market frictions exist and since laws, regulations, and policies differ markedly across economies and over time, improvements along any single dimension may have different implications for resource allocation and welfare depending on the other frictions at play in the economy' (Levine 2004, pp. 5-7). The development of banking and the corresponding development of the deposit and credit markets (including instruments like bank deposits, credits and loans) can be distinguished as part of the financial development. The research whose interim results have provided the starting point for this paper is intended to answer the question, does the banking sector have a significant effect on economic growth in the case of Poland? Hence the following hypothesis: there is a statistically significant relation between the development of the banking sector and economic growth in Poland. Econometric methods are applied. The model is constructed using the method of backward stepwise regression. The tests of autocorrelation and heteroscedasticity, normal distribution, and time series co-integration are carried out. The test results provide the grounds for selecting the generalised least squares method as the method of estimation. The rate of GDP growth in Poland as the natural logarithm (ln) of the GDP value is the dependent variable in the model. The results of Engle-Granger co-integration test are presented below. Augmented Dickey-Fuller test for uhat including one lag of (1-L)uhat sample size 18 unit-root null hypothesis: a = 1 test without constant model: (1-L)y = (a-1)*y(-1) +... + e estimated value of (a -1): -0.671916 test statistic: tau_ct(5) = -3.31857 with the critical value -1.95 (significance level 0.05) asymptotic p-value 0.5838 1st-order autocorrelation coeff. for e: -0.185 As we see above the time series are cointegrated.

The results of model estimation
The results of model estimation are included in Table 1. Source: The author's own calculation with using GRETL. The independent variable, a proxy for the development of the financial sector, in this case of the banking sector (M3), is statistically significant. The model explains the variance of the dependent variable in 99%, a very good measure of matching.  (2016) is worth quoting as the author conducts a theoretical analysis of the effects of more stringent banking regulations on economic growth. He suggests an adverse impact of a higher solvency ratio that works by: -Limiting the supply of bank credits and raising the short-term rate of interest and cost of bank customer service; -Lowering investments as a result of growing interest rates in the long term, -An increase of interest rate and a lower value of assets, which will reduce J. Tobin ratio.
The idea of a financial transaction tax comes in for particular criticism. The author stresses the growing costs of borrowing, bound to hit small and medium-sized enterprises in the first place and consequently impair economic growth in Poland, where these enterprises make an overwhelming contribution to GDP creation and employment. After the so-called bank tax has been introduced, which is in fact a charge on banks' assets and thus credits, the issue as as topical as ever.
The question arises in this connection if it's a good idea to additionally tax banks for their effective management. An answer certainly requires more research ( Bukowski 2016, pp. 25-40) Returning to the banking sector regulations in Basel III, the authors points out the new regulations slow the rate of GDP growth and propose a range of recommendations for prudential policies (Marcinkowska, Wdowiński, 2016, pp. 290 and ff.). The effects of the principles incorporated in the so-called Basel III regulations definitely require more studies, especially as the most recent regulations were introduced in 2018 subject to a vacatio legis.

Conclusion
The analysis undertaken in this paper has demonstrated the banking sector's development has an economically and statistically significant impact on economic growth in Poland. A range of similar studies, both of individual and many economies (based on panel models), indicate the impact of the financial development, including the development of the banking sector, on economic growth is of paramount importance and statistical significance. The effects of banking regulations (Basel III) on economic growth matter, too, as proven with reference to a number of economies, including that of Poland.