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The Impact of Uncertainty on Financial Institutions

Author

Listed:
  • Christopher F Baum

    (Boston College
    DIW Berlin)

  • Mustafa Caglayan

    (Heriot-Watt University)

  • Bing Xu

    (Heriot-Watt University)

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 harms the overall health of the financial sector.

Suggested Citation

  • Christopher F Baum & Mustafa Caglayan & Bing Xu, 2017. "The Impact of Uncertainty on Financial Institutions," Boston College Working Papers in Economics 939, Boston College Department of Economics, revised 20 Sep 2018.
  • Handle: RePEc:boc:bocoec:939
    Note: previously circulated as "Uncertainty Effects on the Financial Sector: International Evidence"
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    financial depth; profitability; non-interest income; stability; uncertainty;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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