Global banking systems, financial stability, and uncertainty: How have countries coped with geopolitical risks?

Abstract

The study provides global evidence on the effects of news-based geopolitical risk (GPR), events, and associated risks on the financial stability of banking systems. With extensive large panel data from 179 economies over the past decades, we document strong adverse effects of GPR on financial stability with the predicted decrease (increase) in the bank (non-performing loans) Z-score. Commercial banking systems are heterogeneously exposed to GPR. Possible mechanisms to mitigate the effects of GPR include multidimensional financial development, enhanced world governance, and public finance. Our findings are robust with a battery of econometric approaches controlling for time-varying macroeconomic factors and banking characteristics (e.g., capitalization, concentration, performance) across countries and regions. The impacts of GPR on global financial stability are persistent when we control for systematic banking crises, economic policy, world uncertainty, and global uncertainty spillovers. While higher capitalized banks could secure ample financial stability with substantial military expenditure, the Asia Pacific and emerging economies are sensitive to widespread GPR. The study highlights the roles of institutional quality and world governance factors through times of uncertainty. In The context of global risks, greater global and comprehensive collaborations with mitigated GPR threats are inevitable for our inclusive growth toward Sustainable Development Goals. Our findings are critical to policymakers, advisers, and economists for our global financial stability and sustainable development.