Economic policy uncertainty and bank systemic risk: A cross-country analysis

Abstract

We examine the impact of economic policy uncertainty (EPU) on systemic risk. We performed regression analysis of data obtained from a large sample of 889 listed banks in 20 countries using an OLS model with two-way fixed effects. Empirical evidence suggests that banks are likely to contribute more to systemic risk when EPU increases. Then, through two-stage regression, we find that this effect operates through the bank leverage risk and bank asset risk channels. Further analyses reveal that some formal bank regulations (e.g., the regulatory environment) and informal institutions (e.g., national culture) can moderate this effect. In addition, we investigate economic policy uncertainty spillovers among our sample countries to help us understand the systemic risk arising from the cross-border transmission of EPU. We find that approximately 50% of the economic policy uncertainty in the sample countries originates from other countries. Developed countries are net exporters of uncertainty, while developing countries are net importers. Therefore, it is necessary for all countries, especially developing countries, to take appropriate measures to address the spillover effects of economic policy uncertainty in other countries and the resulting systemic risk.