Economic uncertainty and bank risk: Evidence from emerging economies

This paper examines the impact of economic uncertainty on the risk of banks in emerging markets. Using the data of approximately 1500 banks in 34 emerging economies during the period of 2000-2016, we find consistent evidence that bank risk increases with the level of uncertainty. Economic uncertainty mainly exerts its impact by affecting banks’ return and its volatility, and the effect of nominal uncertainty is seemingly more conspicuous relative to that of real uncertainty. We also find that the effect of uncertainty on bank risk is conditional on banks’ characteristics such as size and efficiency. Moreover, macroprudential policies can play a stabilizing force by mitigating bank risk as economic uncertainty surges.