Financial Stability as a Public Policy Goal to Increase Local Economic Development: an Empirical Investigation from Italian Labour Market Areas

Financial stability is a prerequisite for sustainable economic development. Assuming that financial stability is a public good, with a negative effect on social welfare and on economic development when risks are not properly controlled, will make regulators ensuring the smooth functioning of the system, promoting regional development and making the health of the financial institutions. This paper contributes to the literature on the relationship between financial stability and growth within the regions of one country, implying that institutional, legal and cultural factors are more adequately controlled and financial markets more accurately bounded. Using a rich sample of Italian banks over the 2001– 2012 period, the paper addresses whether different measures of financial distress affect economic development of labour market areas in Italy. Results show that financial stability has a positive effect on local economic development mainly explained by the bank’s return on average assets.