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The impact of uncertainty on financial institutions: A cross‐country study

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  • Christopher F. Baum
  • Mustafa Caglayan
  • Bing Xu

Abstract

We examine the effects of uncertainty on several facets of the financial sector. Using a large country‐level unbalanced panel dataset, we show that inflation uncertainty reduces availability of private sector credit; harms banks' efficiency and operational performance, evidenced by lower returns and increased reliance on non‐interest income activities; and distorts sectoral stability, as liquidity, banks' appetite for risk and credit risk increases. Our findings, based on the full dataset and country splits, are economically meaningful and provide evidence that uncertainty threatens the overall health of the financial sector.

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  • Christopher F. Baum & Mustafa Caglayan & Bing Xu, 2021. "The impact of uncertainty on financial institutions: A cross‐country study," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 3719-3739, July.
    • Handle: RePEc:wly:ijfiec:v:26:y:2021:i:3:p:3719-3739
    DOI: 10.1002/ijfe.1983
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