Education regarding money and banking always tells us that banking is a critical point for macroeconomics. However, there is not enough evidence to further prove the relationship between banking and volatility. In our view, an integration of small and medium-sized enterprises (SMEs) with serious financing constraints, small open economy and bank-based financial system can provide the best opportunity to explore bank-volatility nexus. Fortunately, Taiwan is the most notable case to offer the key to an understanding of banking and volatility for our students of finance. There is sufficient evidence based on panel data analysis with spatial dependency to support the significance of regional bank lending (credit supply) rather than the stock market (credit demand) in explaining volatility. It is clear that the role of bank system in volatility in Taiwan deserves explicit emphasis.
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