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financial linkages and networks in the global financial system architecture. These linkages have increased systemic risk in the sense that the failure of large banks could trigger not only severe turbulent ramifications in the domestic financial system, but also massive systemic shocks on internationally interconnected market participants, hence threatening financial stability on a global scale. For example, the liquidity crunch post Leman’s bankruptcy brutally disrupted credit supply on interbank markets and corporate credit markets, hence triggering macroeconomic shocks and contractions of severe magnitude, (See: Fig 1&2).

Secondly, the fact that the whole banking business model is based on the confidence of depositors, the financial system stability is very fragile. Under the normal conditions, it is assumed that depositors withdraw their deposits only when necessary. Any unexpected withdrawals by depositors due to asymmetric information or rumors may handicap the asset transformation ability of banks and result in bank runs which may have severe contagion and financial implications. During the Great Depression (1930s), the US economy suffered the sequel of the most devastating financial crisis in human history. Indeed the 1929’s crisis was debatably the result of brutal banking panics which caused more than 9,000 bank failures and over $140Bn deposit losses; leading to systemic and confidence break downs in the financial system, Temzelides (1997). According to Saunders and Wilson (1996), Calomiris et al. (1997) and Temzelides (1997, p.8), “contagion effects played an important role in the panic’s development” in the 1930’s, Tosun and Aloko (2010).

Figure5: Interbank rate jumping Up with Lehman collapse (e)

Figure6: liquidity indexes in Financial Markets

Source: Bloomberg Source: Bank of England, Stability Report, 08

DRIVERS OF ECONOMIC GROWTH

“Drivers of economic growth” is a very controversial theme that has been extensively debated in the realm of economic development policy. First of all, economic growth is defined as a rise in total output of an economy, generally, a rise in the real Gross Domestic Product (GDP) per capital (Wyplozs and Burda, 2005). Studying economic growth brings about essential questions such as why some countries develop faster than other countries, or why are there disappearances in the income level of countries, or why some countries are rich whereas some are poor?

Over the past decades, many economists have been seeking to understand the key drivers of economic growth and the factors which affect growth. The dynamic complex interactions between various organs in the economic system make it difficult for economists to attest with certainty all the factors influencing economic growth. However, many researchers have pointed out three key factors which are vital for the economic growth: technological advances, labor and accumulation capital, (Romer, 1990).

There are different aspects of economic growth, such as micro economical, macro economical, financial aspects, and non-economical aspects, (Alvarez et al., 2007). Financial aspects involve the role of financial institutions in economic growth. From this financial angle, many economists argued that an efficient and liberalized financial sector is crucial for promoting welfare and economic growth. In the process of financial liberalization, inv