The Impact of Economic Uncertainty and Geopolitical Risks on Bank Credit: Evidence from Emerging Economies

Abstract

This paper provides a comparison of the effects of economic uncertainty and geopolitical risks on bank credit growth. We use the World Uncertainty Index (WUI) proposed by Ahir et al. (2018) and Geopolitical Risk Index (GPR) introduced by Caldara & Iacoviello (2018) for the measures of economic uncertainty and geopolitical risks, respectively. Our sample is composed of 2,439 banks from 19 emerging economies for the period of 2010-2019. By using fixed effects and dynamic panel data estimation techniques with GMM estimators, we find that economic uncertainty causes a decrease in overall bank credit growth while no effect of geopolitical risks is documented. Further analysis on the growth of different loan types (consumer, corporate, and mortgage) shows that economic uncertainty hampers the growth of all loan types considered in the paper however, the highest impact is observed on corporate loans. Meanwhile, geopolitical risk dampens consumer and mortgage loans but not corporate loans. Additional analyses on bank ownership and heterogeneity imply that the credit behavior of (1) foreign banks, (2) publicly listed banks, and (3) banks with foreign subsidiaries are immune to economic uncertainties.