Do global and local economic policy uncertainties matter for systemic risk in the international banking system

Using panel data from 60 countries spanning from January 2006 to December 2021, we investigate how economic policy uncertainties (EPUs) affect two subcomponents of systemic risk (systemic linkage and individual risk), and differentiate the influences resulting from global and local EPU shocks. Our findings demonstrate that increased global shocks result in higher systemic linkages, while domestic uncertainties significantly contribute to individual risks. Cross-border bank loans and non-performing loans serve as the channels through which EPUs induce cascading effects. Moreover, heterogeneity analysis reveals the roles of financial openness and financial development in shaping the EPUs-systemic risk nexus.

Automated summary

Using panel data from 60 countries, this study investigates the impact of economic policy uncertainties (EPUs) on systemic risk and distinguishes the effects of global and local EPU shocks. The results show that increased global shocks lead to higher systemic linkages, while domestic uncertainties significantly contribute to individual risks. Cross-border bank loans and non-performing loans are the channels through which EPUs induce cascading effects. Heterogeneity analysis further reveals the role of financial openness and financial development in shaping the nexus between EPUs and systemic risk.