Geopolitical risk, bank regulation, and systemic risk: A cross-country analysis

Abstract

In this paper, we analyze data from 688 listed banks across 33 countries to examine the impact of geopolitical risk on systemic risk and its transmission mechanisms. Our empirical results show that geopolitical risk significantly increases systemic risk. In terms of mechanisms, geopolitical risk elevates systemic risk by increasing individual bank risk, bank asset risk, and triggering asset price bubble bursts. After conducting a series of robustness checks, our findings remain consistent. Additionally, we investigate whether banking regulatory policies can mitigate the impact of geopolitical risk on financial stability. The results indicate that stricter restrictions on banking activities, more robust deposit insurance systems, and regulatory agencies with stronger enforcement capabilities help counteract the rise in systemic risk induced by geopolitical risk, thereby supporting financial stability. This research enhances understanding of the drivers and transmission channels of systemic risk, assisting regulatory authorities in identifying and addressing risks associated with geopolitical uncertainty.