Economic policy uncertainty, bank competition and financial stability

Abstract

Purpose This study aims to examine the impact of economic policy uncertainty and bank competition on the financial stability of the Chinese banking industry. This study answers two fundamental questions. First, does economic policy uncertainty (EPU) affects the financial stability of banks in China? Second, does competition affect the financial stability of the Chinese banking sector? Design/methodology/approach The sample includes all commercial banks to provide a full picture of the Chinese banking sector. This study covers the time between 2011 and 2019. The sample period captures different EPU spikes and key policy changes. This study used different econometric methodologies such as the generalized method of moments and the fixed effect and ordinary least square estimation models. Furthermore, this study used the Instrumental Variable model to solve endogeneity, autocorrelation and unobserved heterogeneity concerns. Besides, alternative EPU and financial stability measures were used. Moreover, this study reestimates the model after dropping the big five state-owned banks. Findings This study found that both EPU and competition reduce financial stability. This implies that EPU has a negative impact on financial stability. This shows that uncertainty distorts resource allocation efficiency and creates confusion, leading to financial instability in the banking sector. Besides, this study found that competition negatively affects financial stability. This result implies that high competition pushes banks toward riskier activities that ultimately lead to increased financial instability. Originality/value This study is the first of its kind that examines the impact of EPU and competition on the financial stability of the Chinese banking sector. This study conducted several robustness tests such as the instrumental variable model, alternative measurement and sample construction methods. This study brings policy implications and lessons for the banking sector.

Economic policy uncertainty and Indian banking stability: the mediating role of regulation and supervision

“…The results of private-monitoring and supervision also support the notion that sound market regulation and supervision improve disclosure requirements and exert governance more effectively over banks. The findings corroborate the studies of Hu and Gong (2019), Wu et al (2020) and Desalegn et al (2023).…”

“…The results of private-monitoring and supervision also support the notion that sound market regulation and supervision improve disclosure requirements and exert governance more effectively over banks. The findings corroborate the studies of Hu and Gong (2019), Wu et al (2020) and Desalegn et al (2023). Furthermore, to reinstate our empirical outcome and contribute to the existing literature on banking stability, we have also included NPLs as a proxy to measure banking sector stability.…”

“…India has a fragmented banking structure, endowed with a large number of private, public and foreign banks that extensively contribute toward catering to the financial needs of one of the largest emerging economies (after China) with a vast population. Numerous studies highlight that a higher share of NPLs hampers banking sector stability and restricts banking profitability (Nkusu, 2011;Desalegn et al, 2023). Therefore, understanding the implication of economic policy uncertainty on the Indian banking industry will add a new domain to the existing literature.…”

Political change, elections, and stock market indicators: a generalized method of moment analysis

“…This research dissects the responses of Japanese financial markets to varying phases of unconventional monetary policies, unraveling the complexities of policy implementation. Similarly, Desalegn et al . (2023) contribute by examining economic policy uncertainty, bank competition and financial stability.…”

“…This research dissects the responses of Japanese financial markets to varying phases of unconventional monetary policies, unraveling the complexities of policy implementation. Similarly, Desalegn et al (2023) contribute by examining economic policy uncertainty, bank competition and financial stability. Their study delves into the interplay between economic policy uncertainty, bank competition and financial stability, shedding light on the influence of economic uncertainties on banking dynamics and overall financial stability.…”