The impact of economic uncertainty and institutional quality on bank profitability: global evidence

Unlike previous studies, our research investigates the diverse impacts of economic uncertainty and the role of institutional quality on bank profitability. Economic uncertainty is represented by multiple indicators, including the World Uncertainty Index, World Trade Policy Uncertainty Index, and Global Economic Policy Uncertainty Index. The dataset used in this study covers a global scope, consisting of 165 countries over the period from 2000 to 2021. We employ the two-step system Generalized Method of Moments (GMM) estimation to regress the proposed models. Our findings reveal robust evidence that all three indicators of economic uncertainty—namely the World Uncertainty Index, the World Trade Policy Uncertainty Index, and the Global Economic Policy Uncertainty Index—have significantly negative effects on bank profitability, measured by both net interest income and return on equity. Furthermore, although institutional quality tends to reduce bank profitability, it plays a crucial role in mitigating the adverse effects of economic uncertainty on bank profitability. In addition, our findings remain consistent and robust across subsample analyses of developed and developing countries. The study provides important implications for policymakers and bank managers, particularly in the current context of heightened economic uncertainty.