Economic Uncertainty and Bank Risk: Evidence from Emerging Economies
58 Pages Posted: 25 Oct 2019 Last revised: 6 Jan 2020
Date Written: January 6, 2020
This paper examines the impact of economic uncertainty on the risk of banks, which is only underexplored in extant literature so far. Using bank-level panel data of approximately 1500 banks in 34 emerging economies during the period of 2000-2016, we find consistent and robust evidence that bank risk increases as the level of economic uncertainty increases. We also investigate possible mechanisms whereby economic uncertainty is translated into bank risk, and present evidence that the uncertainty-bank risk nexus may be attributable to various supply-side effects, including the option value of waiting, the search-for-yield strategy and bank herding behaviors.
Keywords: Economic uncertainty, Bank risk, Emerging economies
JEL Classification: G21, G15
Suggested Citation: Suggested Citation