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The impact of uncertainty on financial institutions: A cross‐country study
Author(s) -
Baum Christopher F.,
Caglayan Mustafa,
Xu Bing
Publication year - 2021
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/ijfe.1983
Subject(s) - market liquidity , economics , inflation (cosmology) , risk appetite , monetary economics , panel data , private sector , credit risk , financial sector , financial stability , financial system , business , finance , econometrics , risk management , physics , theoretical physics , economic growth
We examine the effects of uncertainty on several facets of the financial sector. Using a large country‐level unbalanced panel dataset, we show that inflation uncertainty reduces availability of private sector credit; harms banks' efficiency and operational performance, evidenced by lower returns and increased reliance on non‐interest income activities; and distorts sectoral stability, as liquidity, banks' appetite for risk and credit risk increases. Our findings, based on the full dataset and country splits, are economically meaningful and provide evidence that uncertainty threatens the overall health of the financial sector.