Geopolitical Uncertainty and Banking Risk: International Evidence

Banna, Hasanul; Alam, Ashraful; Alam, Ahmed W.; Chen, Xihui Haviour

Abstract

We study the impact of geopolitical uncertainty on banking risk. Using a large sample of 21,618 unique banks over a period from 2010 to 2021, our results reveal that geopolitical risk (GPR) significantly increases (erodes) banking risk (stability). This finding remains robust using alternative measures of GPR, such as geopolitical acts (GPRA), historical GPR, and U.S-specific GPR indices. Banks that are medium and large in size, measured based on total assets and total loans, and banks that specialize in commercial and savings banking are riskier when GPR is high. Furthermore, the negative effect of GPR is valid for both U.S. and non-U.S. banks, banks originating from NATO member countries, as well as for subsamples excluding Russian and Chinese banks. The increased banking risk mainly attributed to reduction in bank capital and escalated fluctuations in bank profitability. Quantile regressions suggest that the link between GPR and banking risk is not influenced by banks’ pre-existing levels of risk. Our baseline findings survive a set of robustness tests based on change-on-change regressions. Next, we show that banks are more vulnerable against heightened war-based geopolitical uncertainty, such as war threats, military buildups, nuclear threats, beginning of war, and escalation of war. Finally, we find that the detrimental effect of GPR is moderated by banks’ goodwill, capital adequacy, managerial quality, and certain types of bank loans.

Citation

Banna, H., Alam, A., Alam, A. W., & Chen, X. H. (2023). Geopolitical Uncertainty and Banking Risk: International Evidence. [Preprint]

• Other Type: Other
• Online Publication Date: Jan 16, 2023
• Publication Date: 2023
• Deposit Date: Mar 19, 2024
• DOI: https://doi.org/10.2139/ssrn.4325966
• Keywords: Geopolitical risk, war-based geopolitical risk, war, geopolitical uncertainty, banking risk, banking stability