Economic uncertainty and bank risk: Evidence from emerging economies

Abstract

This paper examines the impact of economic uncertainty on the risk of banks, which has only been underexplored in extant literature so far. Using bank-level panel data of more than 1500 banks in 34 emerging economies during the period of 2000–2016, we find consistent and robust evidence that bank risk increases as the level of economic uncertainty increases. We also investigate possible mechanisms whereby economic uncertainty is translated into bank risk, and present evidence that the uncertainty-bank risk nexus is more attributable to the option value of waiting, search-for-yield strategies and bank herding behaviors than various demand-side effects.