Blessing in Disguise: Policy Uncertainty and Bank Systemic Risk

ABSTRACT

Does higher policy uncertainty lead to higher financial risk? This study provides evidence of the opposite. Based on a sample of 16 listed banks from 2011 to 2020 in China, we find that economic policy uncertainty has a significant negative impact on bank systemic risk and that the effect is more pronounced for small and unprofitable banks. Further analysis shows that the decline in bank systemic risk is due to the lower asset and liability structural similarity between banks. This study uncovers a volunteer mechanism of preventing bank systemic risk under policy uncertainty.

KEYWORDS:

• Economic policy uncertainty
• systemic risk
• asset similarity
• liability similarity

JEL:

• D81
• G21
• G28

Disclosure Statement

The authors contributed equally to this paper.

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2093104.

Additional information

Funding

We gratefully thank the financial support from the National Science Foundation of China (71903208), the Program for Innovation Research in Central University of Finance and Economics, the Cultivation of Major Research Projects of Capital University of Economics and Business (ZD202202), the Research and Innovation Team of Capital University of Economics and Business (QNTD202104).