Global Banking Systems, Financial Stability and Uncertainty : How have Countries Coped with Geopolitical Risk?

The study universally examines the consequences of geopolitical risk (GPR) on the financial stability of global banking systems with a large panel of 158 economies around the world over the past decades. We find the adverse effects of GPR on financial stability with the predicted (increase) decrease in the Bank (non-performing loans – NPL) Z-score, where higher capitalized banking systems experience higher exposure to GPR as a source of uncertainty due to information asymmetries. Besides economic growth and inflation rate, international trade openness and multidimensional financial development are the mechanisms to mitigate the consequences of GPR on the world economy. Countries with better governance effectiveness such as higher political stability and well control of corruption can decrease the effects of GPR on their banking stability (increased Bank Z-score and decreased NPL). Besides the financial, governance, and economic mechanisms, the study finds the role of military expenditure in coping with GPR to maintain more stable financial stability through times of uncertainty. Alike but distinguished from the extant literature, the study is among the first to empirically quantify the consequences of GPR with other kinds of uncertainty tested to the banking financial stability due to raising informational asymmetries and higher costs of financial intermediation worldwide