Economic uncertainty or financial uncertainty? An empirical analysis of bank risk-taking in Asian emerging markets

Abstract

This paper examines the impact of economic uncertainty and financial uncertainty on the risk of banks in a sample of nine Asian emerging economies, using bank-level panel data over the period 2000–2014. After controlling for bank characteristics, macroeconomic conditions, financial regulations and some other market-level factors, we find consistent evidence that banks’ risk-taking tends to vary heterogeneously with increased economic and financial uncertainty, i.e., higher economic uncertainty is associated with higher bank risk-taking level while higher financial uncertainty is associated with lower bank risk-taking. Meanwhile, uncertainty likely exerts heterogeneous impact on banking markets with different ownership structure, as we find different nexus between uncertainty and the risk of foreign- /domestic state-owned banks.