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Geopolitical tensions and systemic vulnerability in the banking sector: Evidence from China

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  • Yuan, Chen
  • Kang, Runqi
  • Liu, Lanbiao

Abstract

This study examines how geopolitical frictions between China and the United States affect the stability of China’s commercial banking sector. Empirical evidence shows that an escalation in geopolitical tensions is associated with a pronounced rise in systemic risk. From a macroeconomic perspective, geopolitical shocks primarily operate through heightened exchange rate volatility and the deterioration of aggregate economic expectations. At the bank-firm level, these shocks are transmitted via worsening corporate credit quality and increased exposure to concentrated lending. FinTech adoption, stronger capital adequacy, and structural monetary policy instruments all mitigate the adverse effects of geopolitical risk and enhance banking system resilience. The results confirm the presence of heterogeneity across bank ownership and periods. Focusing on China as the primary recipient of US–China geopolitical shocks, this study offers a framework applicable to other open economies facing rising geopolitical uncertainty.

Suggested Citation

  • Yuan, Chen & Kang, Runqi & Liu, Lanbiao, 2026. "Geopolitical tensions and systemic vulnerability in the banking sector: Evidence from China," Finance Research Letters, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:finlet:v:94:y:2026:i:c:s1544612326002102
    DOI: 10.1016/j.frl.2026.109679
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