1 s2.0 S0927538X22001238 Main

Pacific-Basin Finance Journal 75 (2022) 101828
Contents lists available at ScienceDirect
Pacific-Basin Finance Journal

journal homepage: www.elsevier.com/locate/pacfin
Economic policy uncertainty and bank systemic risk: A

cross-country analysis
Yuejiao Duan, Xiaoyun Fan, Yu Wang *
School of Finance, Nankai University, 38 Tongyan Road, Jinnan District, Tianjin 300350, PR China
A R T I C L E I N F O A B S T R A C T
JEL: We examine the impact of economic policy uncertainty (EPU) on systemic risk. We performed
F30 regression analysis of data obtained from a large sample of 889 listed banks in 20 countries using
G18 an OLS model with two-way fixed effects. Empirical evidence suggests that banks are likely to
P16
contribute more to systemic risk when EPU increases. Then, through two-stage regression, we find
Keywords: that this effect operates through the bank leverage risk and bank asset risk channels. Further
Banking
analyses reveal that some formal bank regulations (e.g., the regulatory environment) and
International
informal institutions (e.g., national culture) can moderate this effect. In addition, we investigate
Systemic risk
Economic policy uncertainty economic policy uncertainty spillovers among our sample countries to help us understand the
systemic risk arising from the cross-border transmission of EPU. We find that approximately 50%
of the economic policy uncertainty in the sample countries originates from other countries.
Developed countries are net exporters of uncertainty, while developing countries are net im
porters. Therefore, it is necessary for all countries, especially developing countries, to take
appropriate measures to address the spillover effects of economic policy uncertainty in other
countries and the resulting systemic risk.
1. Introduction
In the past few years, several major events, including the 2008 global financial crisis, the COVID-19 pandemic and, most recently,
the Russia–Ukraine war intensify global uncertainty. In response to the impact of these “black swan” events, governments have to
change their monetary, fiscal, and tax affairs and other regulatory policies (Tang et al., 2021). These adjustments to the economic
system and financial reforms bring uncertainty to future economic policies, that is, higher economic policy uncertainty (EPU). Prior
studies show that EPU negatively affects economic development. Baker and Bloom (2013), using a cross-country sample, verify that
EPU reduces GDP growth. EPU also reduces firm investment (Kang et al., 2014; Wang et al., 2014), hinders corporate R&D activity
(Borghesi and Chang, 2020; Cui et al., 2021), increases risk premiums on stocks (Kelly et al., 2016) and undermines the profitability of
firms (Iqbal et al., 2020; Jory et al., 2020). In terms of financial intermediaries’ behaviour, Bordo et al. (2016) find that U.S. banks
experience less credit growth in times of high EPU, an effect that might slow economic recovery after the Great Recession. Berger et al.
(2020) find that EPU increases bank liquidity hoarding and therefore has adverse effects on firms and households. In addition, some
researchers find that EPU decreases the stability of individual banks and that this effect is more pronounced during financial crises
(Phan et al., 2021; Shabir et al., 2021).
In this paper, we examine how EPU harms the economy and financial systems through a channel of systemic risk. Since the 2008
* Corresponding author.
E-mail addresses: dyj@nankai.edu.cn (Y. Duan), fanxiaoyun@vip.sina.com (X. Fan), nkuwy@outlook.com (Y. Wang).
https://doi.org/10.1016/j.pacfin.2022.101828
Received 17 April 2022; Received in revised form 23 July 2022; Accepted 7 August 2022
Available online 12 August 2022
0927-538X/© 2022 Published by Elsevier B.V.
Y. Duan et al. Pacific-Basin Finance Journal 75 (2022) 101828
financial crisis, scholars have carried out numerous studies on the determinants of systemic risk. Some literature explores the
microscopic determinants of systemic risk in combination with bank financial indicators. For example, Varotto and Zhao (2018) found
that there is a significant positive correlation between bank size and systemic risk. This is because large banks are highly irreplaceable
in the economic and financial system and are often given priority to receive government assistance during crises, but they are also more
prone to moral hazard problems. In addition, numerous empirical studies have shown that bank leverage, noninterest income ratio,
loan loss provisions, total long-term debt ratio and ownership structure have impact on bank systemic risk (Acharya and Kulkarni,
2012; Adrian and Brunnermeier, 2016; Bostandzic and Weiß, 2018).
At the same time, many studies point out that systemic risk is not only determined by the micro factors of the bank itself, but also
affected by the macro factors of the country. For example, Brunnermeier et al. (2020) found that the formation and collapse of asset
price bubbles in real estate and stock markets will significantly increase systemic risk in the host country. Chen et al. (2021) found that
strict banking supervision exacerbates banks’ capital shortages, leading to higher bank systemic risk. In addition, some scholars have
found that public health emergencies, such as the COVID-19 epidemic also have a negative impact on the stability of the financial
system (Duan et al., 2021).
While previous research discussed in details how the EPU affects the macroeconomy and the behaviours of firms and banks, little is
known about how EPU affects the stability of the banking system as a whole. We seek to close this gap by studying the relationship
between EPU and bank systemic risk in a multinational sample.
Banks may contribute more systemic risk during times of high EPU for several reasons. On the one hand, EPU can directly influence
banks’ behaviour and business decisions. EPU not only hinders the growth of bank credit but also causes more serious information
asymmetry between banks and borrowers, resulting in unreasonable allocation of bank loan resources. This leads to a decrease in bank
income and an increase in nonperforming loans (Bordo et al., 2016; Chi and Li, 2017; Danisman et al., 2020). On the other hand, EPU
can also indirectly influence banks by affecting companies and households. EPU can cause firms to have uncertain expectations about
government policies, thereby reducing investment, employment and output (Baker et al., 2016). The reduction in investment and
output causes firms to experience a sharp drop in revenue. And the volatility of household income will also increase markedly due to
rising unemployment and a decline in new hiring. As a result, firms and households may not be able to service their debt, leading to a
substantial increase in the probability of default (Barua, 2021). Banks will then face more serious credit risks and may not be able to
recover their loans in full. The number of nonperforming loans will increase, and the bank’s income will decrease (Beck and Keil,
2021). These impacts on bank asset and revenue will ultimately damage bank profits, solvency and capital, and increase the systemic
fragility.
Alternatively, EPU may have little effect on bank systemic risk. The banking system has undergone many reforms related to su
pervision and risk management since the 2008 financial crisis, making it more resistant to negative impacts. In addition, during times
of high EPU, firms and banks may make timely changes in their risk-taking behaviour, reducing risky investments and holding sounder
assets, thereby reducing debt defaults and systemic fragility. Therefore, whether and how EPU impacts bank systemic risk is an issue
that needs to be discussed.
In addition, some studies show that the characteristics of the countries in which banks operate, such as institutional and nonin
stitutional arrangements, have a significant impact on bank systemic risk (Berger et al., 2020; Brunnermeier et al., 2020). Thus,
conducting research using cross-country data allows us to take into account more country-level factors and thereby to obtain a more
complete picture of the relationship between EPU and bank systemic risk.
In this context, we examine not only the relationship between EPU and bank systemic risk but also whether formal regulations at
the national level mitigate systemic risk arising from EPU. Some studies show that banking regulations such as higher capital re
quirements help strengthen banks’ resilience, while others find that restrictions on banking activities are detrimental to banks’
development and stability (Barth et al., 2004; Chen et al., 2021). Few studies have examined how the banking regulatory environment
moderates the impact of uncertainty on the systemic risk of banks across countries. Therefore, we wished to empirically explore
whether stricter regulation helps mitigate systemic risk during times of high EPU.
In addition to the foregoing, we examine how national culture moderates the relationship between EPU and systemic risk. National
culture reflects basic national characteristics, and culture may influence the decision-making attitudes and perceptions of participants
in various economic activities, including individuals, firms, and financial intermediaries (Berger et al., 2021b). For example, indi
vidualistic cultures that encourage personal achievement and success are often associated with independence, overconfidence, and
overoptimism. Power distance measures the degree to which individuals with less power expect and accept an unequal distribution of
power. It characterizes a highly stratified society that values coherence more than independence. Uncertainty avoidance involves a
society’s tolerance for uncertain, unfamiliar, or unstructured situations. People in uncertainty-avoiding cultures prefer predictable
events and tend to only take known risks. Previous studies have shown that national culture influences banks’ risk-taking behaviours
and bank failures (Ashraf et al., 2016; Berger et al., 2021b; Boubakri et al., 2017; Kanagaretnam et al., 2019). Ashraf et al. (2016) found
that banks in countries with high individualism, low uncertainty avoidance, and low power distance engage in significantly higher
risk-taking. Berger et al. (2021b) found that individualism and masculinity are positively associated with bank failures. Duan et al.
(2021) found that power distance, collectivism, uncertainty avoidance and long-term orientation help mitigate the negative impact of
the COVID-19 pandemic on the financial system. Against this backdrop, we further examine whether national culture helps mitigate
the impact of high EPU on the stability of banking systems.
2
Using a dataset of 889 publicly traded banks in 20 countries between January 2000 and December 2020, we empirically test how
EPU affects systemic risk. We adopted ΔCoVaR (Adrian and Brunnermeier, 2016) as a proxy for systemic risk. As our variable of
interest, we use the EPU index developed by Baker et al. (2016), which can be obtained from these authors’ website.1 We find that as
the EPU index has increased, bank systemic risk has increased significantly. Additional analyses reveal that bank leverage risk and
bank asset risk are two important channels. In various robustness tests, these conclusions still hold. Next, we examine the moderating
effects of the regulatory environment and national culture on the relationship between EPU and systemic risk. The results show that
during periods of high EPU, regulatory systems in which there is more regulatory tolerance help mitigate the rise in systemic risk. In
addition, national culture also plays a significant role. Countries with greater power distance, less individualism, and longer-term
orientation are more resilient to the impact of EPU on systemic risk. Moreover, we estimate the EPU spillovers among our sample
countries and find that, on average, approximately 50% of the EPU of these countries can be explained by shocks originating in other
countries, with developed countries driving far more spillovers than developing countries (58.5% and 26.35%, respectively). In
particular, the spillover effect caused by the U.S. can be as high as 103.1%, far greater than the spillovers driven by other countries.
This discussion enables us to further understand how the vulnerability of banks in developing countries is affected by developed
countries through the channel of EPU.
Our study makes two main contributions to the literature. First, it adds to the literature on the determinants of bank systemic risk.
Previous research has shown that systemic risk is driven by factors such as bank size, bank asset structure, ownership structure,
regulation and other country-level characteristics (Acharya and Kulkarni, 2012; Adrian and Brunnermeier, 2016; Berger et al., 2020;
Bostandzic and Weiß, 2018; Brunnermeier et al., 2020). To the best of our knowledge, our study is the first to relate EPU to bank
systemic risk using a cross-country dataset. We demonstrate that EPU creates significantly increased systemic risk through the channels
of bank leverage risk and bank asset risk. This has important implications in that it allows policymakers, regulators and bankers to
better understand the sources of systemic risk and prevent it.
Second, our study adds to the extant EPU literature, particularly to research on the impact of EPU on the banking sector. Prior
studies have focused on how EPU affects bank policy, bank performance and the stability of individual banks (Berger et al., 2020;
Bordo et al., 2016; Chi and Li, 2017; He and Niu, 2018; Khan et al., 2020; Phan et al., 2021; Shabir et al., 2021; Tran et al., 2021; Wang
et al., 2022). In contrast, we focus on how EPU affects the stability of the banking system as a whole and the moderating roles of formal
and informal institutions. These findings have important policy implications.
The remainder of this paper is organized as follows. In Section 2, we present a literature review and develop our hypothesis. Section
3 presents the variables used in the analysis, describes the sample and reports summary statistics. Section 4 describes the main
empirical results and robustness tests, and Section 5 concludes the paper.
2. Literature review and hypothesis development
There has been a steady stream of research on economic policy uncertainty in recent decades. In early studies, various variables,
including tax policy uncertainty, budget deficit uncertainty, foreign direct investment strategy uncertainty and election-year effects,
were used to measure uncertainty (Hassett and Metcalf, 1999; Hermes and Lensink, 2001; Julio and Yook, 2012). Since its introduction
by Baker et al. (2016), the economic policy uncertainty (EPU) index has been used as a leading measure of uncertainty. In the U.S., the
EPU index is calculated as a weighted average of three components, including news coverage related to EPU, the degree of uncertainty
related to future tax code changes, and forecast divergence in future monetary and fiscal policy, while most other countries’ EPU
indexes are news-related.
Since the 2008 financial crisis, more attention has been given to research on bank systemic risk. As a measure of systemic risk for
individual banks, Adrian and Brunnermeier (2016) propose ΔCoVaR, which takes into account changes in the banks’ assets’ market
value, namely, “the change in the value at risk of the financial system conditional on an institution being under distress relative to its
median state”. Systemic risk measures the risk spillovers of individual banks to the financial system, which is distinct from previous
studies that measure the stability of individual banks (Goetz, 2018; Lepetit and Strobel, 2015). Some scholars have made a distinction
between systemic risk and individual risk (Laeven et al., 2016). Prior studies have found that banks with larger total assets, higher
leverage and lower loan portfolio quality have greater systemic risk (Adrian and Brunnermeier, 2016; Bostandzic and Weiß, 2018). In
addition, Duan et al. (2021) found that severe public health crises (such as the COVID-19 pandemic) can also lead to more severe bank
systemic risk through government policies and bank default risk channels.
Previous studies show that during periods of high EPU, firms have less investment (Chen et al., 2019; Wang et al., 2014), lower R&D
activity (Borghesi and Chang, 2020; He et al., 2020) and worse performance (Iqbal et al., 2020; Jory et al., 2020). EPU also signifi
cantly affects network connectivity between stock markets and changes the financing structure of firms (Tabash et al., 2022; Youssef
et al., 2021). In addition, EPU significantly affects the financial system. For example, in times of high EPU, banks often change interest
rates and reduce loan amounts for borrowers, leading to a reduction in credit supply (Bordo et al., 2016; Danisman et al., 2020; Hu and
Gong, 2019). In addition, higher EPU is often connected with higher bank loan loss provisioning and liquidity hoarding and less
derivatives hedging (Berger et al., 2020; Danisman et al., 2020; Tran et al., 2021; Wang et al., 2022). At the same time, EPU also leads
to aggravated information asymmetry between banks and borrowers, increasing the likelihood of unreasonable allocation of bank loan
resources. This will lead to a decrease in bank revenue and an increase in the number of nonperforming loans (Bordo et al., 2016; Chi
1
BBD index website: http://www.policyuncertainty.com.
3
and Li, 2017; Danisman et al., 2020).

From the perspective of firms and households, in times of high EPU, lower business investment and output mean that businesses
face sharply lower incomes and lower output, while households face unemployment and lower incomes. Under these circumstances,
firms and households may become insolvent, leading to a substantial increase in the probability of default (Barua, 2021). Thus, bank
revenue decreases, and credit risk and nonperforming loan ratios may increase (Chi and Li, 2017). Therefore, during times of high EPU,
banks are less valuable and have lower stability (He and Niu, 2018; Phan et al., 2021). As bank asset quality and profits, solvency and
capital are eroded, the vulnerability of banking systems increases, and banks’ contribution to systemic risk is likely to increase.
Conversely, EPU might have little impact on bank systemic risk. In recent years, there have been numerous reforms in the fields of
bank regulation and risk management, and the banking system’s resistance to negative impacts has significantly improved.
Furthermore, in times of high EPU, corporations and banks may change their risk-taking behaviour, reducing risky investments and
holding more robust assets and thereby reducing debt defaults and systemic vulnerabilities. In the review of the related literature, we
find that although studies have discussed the effect of EPU on bank behaviour and individual bank risk, investigation of the role of EPU
on systemic risk is still lacking in the literature. This study is the first to reveal the effect of EPU on systemic risk. In that context, we
propose the following two opposing hypotheses:
Hypothesis 1a. EPU significantly increases bank systemic risk.
Hypothesis 1b. EPU does not have a significant impact on bank systemic risk.
One objective of banking supervision is to enhance the stability of banks and the resilience of the banking sector. Many literature
studied the impact of banking regulation on the stability of individual banks or on that of banking systems. Some scholars argue that
higher capital requirements force banks to hold more capital buffers, thereby increasing their capacity to absorb losses caused by
adverse outcomes in portfolio risk. Tighter restrictions on regulatory activity can also deter banks from engaging in riskier activities,
thereby mitigating the impact of adverse shocks on bank stability. For example, Fratzscher et al. (2016) found that the stricter bank
capital and liquidity requirements imposed after the global financial crisis increased the stability of banks in various countries and this
improvement in stability was affected by the countries’ institutional and governance quality. Nguyen (2021) found that strengthening
the supervision of bank activity restrictions and capital requirements can alleviate the adverse impact of policy uncertainty on the
stability of individual banks.
However, some scholars hold different opinions. For example, Barth et al. (2004) examined the relationship between banking
supervision and banking sector development by examining a sample of 107 countries. The results show that restriction of bank activity
is negatively related to bank development and stability. In addition, the establishment of access barriers for foreign banks is positively
related to bank fragility, while factors such as capital regulatory requirements and supervisory power are not closely related to the
development, performance or stability of banks. Ahamed and Mallick (2017) studied the impact of regulatory forbearance on the
stability of individual banks using the unique programme of corporate debt restructuring (CDR) in India. It was found that regulatory
tolerance can have a positive impact on the stabilities of member banks. Saeed et al. (2020) studied the relationship between
diversification, efficiency and excess value in the banking sector and found that relative to financial institutions that were split into
separate business activities, financial institutions that engaged in different activities have higher excess market value and may also
enjoy higher efficiency. Chen et al. (2021) found that strict banking supervision exacerbates banks’ capital shortages, leading to higher
bank systemic risk. Duan et al. (2021) examined the moderating effect of banking regulatory policies on systemic risk during the
COVID-19 pandemic and found that banking activity restrictions, capital regulations, and supervisory authority did not significantly
affect the impact of the epidemic on bank systemic risk.
Through our analysis of the above literature, we find that the real picture of the impact of banking supervision on bank stability
remains vague. Specifically, there is a lack of research on how banking supervision shapes the impact of EPU on systemic risk.
Therefore, based on previous studies, we propose the following hypotheses:
Hypothesis 2a. Banking regulatory requirements such as restrictions on banking activities, capital requirements and supervisory
powers mitigate the impact of EPU on bank systemic risk.
Hypothesis 2b. Banking regulatory requirements such as restrictions on banking activities, capital requirements and supervisory
powers exacerbate the impact of EPU on bank systemic risk.
Hypothesis 2c. Banking regulatory requirements such as restrictions on banking activities, capital requirements and supervisory
powers do not affect the impact of EPU on bank systemic risk.
Hypothesis 2d. Banking regulatory tolerance mitigates the impact of EPU on bank systemic risk.
As an important noninstitutional regulatory component, the impact of national culture on bank behaviour has been extensively and
deeply studied in recent years (Berger et al., 2021b; Boubakri et al., 2017; Kanagaretnam et al., 2014, 2019). In empirical research,
Hofstede’s national cultural dimension is often used to describe cultural attributes. For example, individualism that encourages
personal achievement and success and masculinity that emphasizes competitiveness and achievement are positively associated with
bank risk-taking and bank failure (Berger et al., 2021b; Boubakri et al., 2017; Kanagaretnam et al., 2014). Uncertainty avoidance
represents society’s tolerance for uncertainty and is negatively correlated with bank risk-taking (Ashraf et al., 2016; Kanagaretnam
et al., 2014). Duan et al. (2021) examined the moderating effect of national culture on systemic risk during the COVID-19 pandemic
and found that countries with higher power distance, greater collectivism, higher uncertainty avoidance and more long-term orien
tation are better able to withstand the impact of the pandemic on systemic risk. In this section, we discuss the five national cultural
4
dimensions of individualism (IDV), power distance (PDI), masculinity (MAS), uncertainty avoidance (UAI), and long-termism (LTO)
and analyse whether they can mitigate the impact of EPU on bank systemic risk.
2.1. Individualism, EPU and bank systemic risk
As mentioned above, individualism is associated with independence, personal achievement, overconfidence, and overoptimism.
The emphasis placed on individual achievement in individualistic countries may lead bank and corporate managers in these countries
to choose portfolios that have relatively higher expected returns and carry higher risk and may make them less likely to employ
compensatory risk mitigation controls. Additionally, managers in individualistic cultures are more likely to believe that their abilities
are above average, and this overconfidence and overoptimism may lead to more trading volume and volatility (Chui et al., 2010). The
greater macroeconomic risks that exist during periods of high EPU further magnify the harm of these high-risk behaviours, increase the
possibility of bank crises, and ultimately lead to an increase in bank systemic risk. Based on this, we propose the following hypothesis:
Hypothesis 3a. Individualism exacerbates the impact of EPU on bank systemic risk.
2.2. Power distance, EPU and bank systemic risk
As mentioned earlier, societies with higher power distance are relatively stratified; in such societies, information is restricted by a
hierarchy, and obedience is valued more highly than independence. A greater power distance indicates that subordinates are more
obedient to their superiors. Therefore, during periods of high EPU, mitigation measures or responses proposed by policymakers and
bank management to address the uncertain macroeconomic environment can be implemented more effectively, thereby reducing the
level of systemic risk (Berger et al., 2020; Duan et al., 2021). Therefore, we propose the following hypothesis:
Hypothesis 3b. Power distance mitigates the impact of EPU on bank systemic risk.
2.3. Masculinity, EPU and bank systemic risk
Masculinity emphasizes competition, achievement and material success and may be associated with a tendency to acquire and to
overinvest. In more masculine societies, bank managers may be less risk-averse (Bellucci et al., 2010) and may be more likely to
manage returns than to control risks (Kanagaretnam et al., 2011). Thus, masculinity may increase the likelihood of bank crises during
periods of high EPU, thereby increasing systemic risk.
On the other hand, high masculinity is associated with more focus on work and business and with less caring for the weak and
nurturing relationships. As a result, in countries with relatively high masculinity, bank managers may be more decisive in cutting off
credit to borrowers who pose a credit risk and laying off underperforming employees. This helps reduce the likelihood that credit
resources will be misallocated and bad debts will be formed during periods of high EPU and thus helps protect bank profits and capital
and reduce bank systemic risks. These opposing predictions yield the following hypotheses:
Hypothesis 3c. Masculinity exacerbates the impact of EPU on bank systemic risk.
Hypothesis 3d. Masculinity mitigates the impact of EPU on bank systemic risk.
2.4. Uncertainty avoidance, EPU and bank systemic risk
Uncertainty avoidance refers to a cultural index of tolerance for uncertain, unknown, or unstructured situations. Banks in countries
with cultures that rank high in uncertainty avoidance are more likely to reduce their risky assets when faced with high EPU, thereby
reducing the likelihood of a crisis and contributing less to systemic risk (Ashraf et al., 2016).
However, countries with high levels of uncertainty aversion tend to avoid competition; competition may be associated with greater
bank risk according to the “competition-stability” view. Low competition leads to high lending rates, increasing moral hazard and
adverse selection problems, making bank lending riskier and increasing the likelihood of failure (Boyd and De Nicoló, 2005). This risk
leads to a greater number of debt defaults when EPU rises, an effect that contributes to higher systemic banking risk. Thus, we propose
the following opposing hypotheses about uncertainty avoidance:
Hypothesis 3e. Uncertainty avoidance exacerbates the impact of EPU on bank systemic risk.
Hypothesis 3f. Uncertainty avoidance mitigates the impact of EPU on bank systemic risk.
2.5. Long-termism, EPU and bank systemic risk
In countries with higher long-term orientation, policymakers, banks and residents value long-term development over short-term
volatility. In such countries, short-term changes in EPU will have a weaker impact on the economy and will cause relatively less
harm and less systemic risk. Based on this, we propose the following hypothesis:
Hypothesis 3g. Long-termism mitigates the impact of EPU on bank systemic risk.
5
3. Data and methodology
3.1. Systemic risk
Following Adrian and Brunnermeier (2016), we use ΔCoVaR, which represents the value of tail risk spillover from individual banks
into the system, as the main proxy variable for systemic risk. We calculated ΔCoVaR using a DCC-GARCH model as Duan et al. (2021).
The model is expressed as follows:
MEi,j,t • LEV i,j,t − MEi,j,t− 1 • LEV i,j,t− Ai,j,t − Ai,j,t− 1
(1)
1
Xi,j,t = = ,
MEi,j,t− 1 • LEV i,j,t− 1 Ai,j,t− 1
where Xi, j, t is the market value change rate for bank i in country j;
LEVi, j, t = BAi, j, t/BEi, j, t represents leverage; MEi, j, t is the market value of equity. Ai, j, t denotes the market value of assets, and Xi, j, t
includes information on off-balance sheet items, exposures from derivative contracts, and other claims that are not properly captured
by the accounting value of total assets. These measures capture systemic risk better than do stock returns. In addition, we define Xj, t,
the systemic returns in country j, as follows:
( / )
∑N ∑N
Xj,t = i=1
Xi,j,t • Ai,j,t− 1 i=1
Ai,j,t− 1 . (2)
Next, we assume that the returns of individual bank i and those of the financial systems of country j follow a bivariate normal
distribution:
( ( ( )2 ))
( ) σi,j,t ρi,j,t σ i,j,t σj,t
Xi,j,t , Xj,t ∼ N 0, ( )2 , (3)
ρi,j,t σ i,j,t σj,t σj,t
where σ i, j, t and σj, t denote the standard deviations of Xi, j, t and Xj, t, respectively, and ρi, j, t represents the dynamic correlation co
efficient between Xi, j, t and Xj, t. By using DCC-GARCH (1,1) to estimate the values of the above estimators, Eqs. (4)–(5) can be
formulated as follows:
VaRi,j,t (q) = − Φ− 1 (q)σj,t × 100, (4)
ΔCoVaRi,j,t (q) = − Φ− 1 (q)ρi,j,t σ j,t × 100. (5)

− 1
In this paper, we assume that q = 0.05; thus, Φ (0.05) = − 1.96. To be more intuitive, in this article we multiply the calculation
result of ΔCoVaR by − 1. To avoid the inconvenience of comparing very small numerical values in our subsequent empirical analysis,
Table 1
Sample distribution.
Country Banks Observations ΔCoVaR EPU
Australia 7 1176 1.994 4.573

Canada 8 480 1.600 4.421
Chile 8 1173 1.448 4.604
China 20 2508 1.696 5.250
Colombia 7 764 1.551 4.692
Denmark 22 2717 2.282 4.831
France 21 1926 2.543 5.180
Germany 12 1347 1.710 4.964
Greece 6 929 2.319 4.544
India 38 5546 1.975 4.457
Italy 22 2550 2.114 4.692
Japan 98 15,020 1.714 4.631
Korea 12 1493 2.530 4.925
Mexico 6 730 1.915 3.952
Russia 14 1368 3.154 5.192
Singapore 3 576 1.785 4.860
Spain 8 1174 2.427 4.785
Sweden 3 541 2.607 4.554
United Kingdom 11 1415 2.001 5.400
United States 563 71,441 1.661 4.807
This table shows the number of banks, observations, average ΔCoVaR (%) and EPU over the sample period for each country. There are 114,874
observations from 889 banks (SIC code 6020) in 20 countries from January 2000 to December 2020. The data required to calculate ΔCoVaR are from
COMPUSTAT, CRSP, and the EPU index is from the BDD website. We use ΔCoVaR to represent systemic risk. The monthly country-level ΔCoVaR is
calculated by weighting the corresponding country’s bank market value over the sample period. EPU is the arithmetic mean of the economic policy
uncertainty index in each country.
6
we multiply the right-hand side by 100. Since we adopt a method based on market price information to calculate bank systemic risk,
our sample is limited to listed banks.
3.2. Economic policy uncertainty (EPU) data
Baker et al. (2016) proposed an EPU index that is based on news reports. The EPU index reflects the proportion of national
newspaper articles that contain economic, policy and uncertainty-related articles. The index can be obtained from the official BBD
website. Following Gulen and Ion (2016), we adopt the natural logarithm of the EPU index as our main explanatory variable.
We merge the EPU data with the systemic risk dataset using the gvkey and country code identifier from CRSP and Compustat-
Capital IQ. The final sample includes 889 listed banks in 20 countries and covers the period from January 2000 to December 2020.
3.3. Other controls
We include in our regression analysis a set of control variables that have been shown in past research to be related to systemic risk,
bank risk and bank performance (Anginer et al., 2014; Bostandzic and Weiß, 2018; Brunnermeier et al., 2020; Khan et al., 2020; Laeven
et al., 2016). These include (1) CPI, (2) the percentage change in nominal GDP (GDP Change), (3) bank total assets (Total Assets), (4)
bank leverage (Leverage), (5) the average return on assets (ROA), (6) the rate of change in the bank’s total assets (Asset Grow), (7) gross
loans as a percentage of the bank’s total assets (LoanToAsset), (8) total interest income divided by operating revenue (InterestRatio), (9)
total loan loss provision divided by the value of gross loans (LLP), and (10) the ratio of liquid assets to total deposits and funds
(Liquidity).
We summarize all variables definitions in Appendix A. To mitigate outliers from confounding the findings, we winsorize all
continuous variables at the 1% and 99% levels.
3.4. Descriptive statistics
Table 1 displays the sample distribution. Stock returns for U.S. banks were obtained from CRSP. Stock returns for non-U.S. banks
were obtained from Compustat-Capital IQ. We collected data on listed banks in all countries for which EPU data are available. We
exclude countries with less than three listed banks and banks with negative stock prices or missing returns. Our final sample includes
data on 889 banks in 20 countries and consists of 114,874 observations during the period from January 2000 to December 2020. These
sample allows us to explore how EPU affects bank-level systemic risk across countries.
Table 2 shows the summary statistics. On average, ΔCoVaR is approximately 1.097 with a standard deviation of 0.953, suggesting
that the average systemic risk contribution of sample banks is 1.097%, consistent with the estimates of Bostandzic and Weiß (2018) and
Berger et al. (2021a). There is considerable variation across banks with the 25th and 75th percentiles being 0.369 and 1.524,
respectively.
The mean value of the economic policy uncertainty index (EPU) is 4.765, and the 25th and 75th percentiles are 4.471 and 5.042,
respectively. Average Inflation is 2.177%, and mean GDP Change is 1.97%. We take the above two variables as country-level control
variables. Table 2 also reports the main control variables, including banks’ Total Assets, Leverage and ROA.
Table 3 reports the pairwise correlation coefficients between the main variables. We find that there is a significant correlation
between ΔCoVaR and EPU, with a correlation coefficient of 0.190. This suggests that growth in EPU is positively related to bank
systemic risk. Furthermore, consistent with the results of Brunnermeier et al. (2020), inflation, bank size, and leverage are positively
related to systemic risk, while GDP Change and ROA are negatively related to systemic risk.
Fig. 1 shows the approximate relationship between ΔCoVaR and EPU. In this figure, the horizontal axis is the EPU index, which is
the arithmetic mean of the EPU index in each country. The vertical axis is ΔCoVaR, which is obtained by taking the weighted average of
the market values of banks in the corresponding country during the sample period. The fitted line slopes upwards, indicating that bank
systemic risk is positively correlated with EPU. In Fig. 2, we show the relationship between global bank systemic risk(ΔCoVaR) and EPU
over time worldwide. The horizontal axis is the world-month-level EPU index, and ΔCoVaR is obtained by taking the weighted average
Table 2
Summary statistics.
Variables Observations Mean Std. Dev. P25 P50 P75
ΔCoVaR 114,874 1.097 0.953 0.369 0.927 1.524

EPU 114,874 4.765 0.461 4.471 4.723 5.042
Inflation 114,874 2.177 1.891 1.234 2.069 3.041
GDP Change 114,874 1.97 2.587 1.223 2.161 2.996
Total Assets 114,874 15.823 2.351 14.183 15.64 17.362
Leverage 114,874 17.563 17.277 7.296 10.457 19.858
ROA 114,874 1.001 3.123 0.35 0.87 1.23
This table shows summary statistics for ΔCoVaR (%), EPU, and control variables in the baseline regression. There are 114,874 observations from 889
banks in 20 countries, over January 2000 to December 2020. We use ΔCoVaR to represent systemic risk. EPU is the overall EPU index. Inflation is the
consumer price index. GDP Change means the percentage change in nominal GDP. Total Assets represents bank total assets. Leverage is the bank
leverage. ROA is the average return on assets (ROAA).
7
Table 3
Correlations.
Variables ΔCoVaR EPU Inflation GDP growth Total Assets Leverage ROA
ΔCoVaR 1.000
EPU 0.190*** 1.000
Inflation 0.038*** − 0.112*** 1.000
GDP growth − 0.214*** − 0.287*** 0.400*** 1.000
Total Assets 0.576*** 0.043*** − 0.053*** 0.036*** 1.000
Leverage 0.143*** 0.125*** − 0.177*** − 0.166*** 0.243*** 1.000
ROA − 0.095*** 0.036*** 0.042*** 0.077*** − 0.179*** − 0.213*** 1.000
This table shows pairwise correlation coefficients for variables in our baseline regression. There are 114,874 observations from 889 banks in 20
countries, over January 2000 to December 2020. We use ΔCoVaR to represent systemic risk. EPU is the overall EPU index. Inflation is the consumer
price index. GDP Change means the percentage change in nominal GDP. Total Assets represents bank total assets. Leverage is the bank leverage. ROA is
the average return on assets (ROAA). ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
Fig. 1. ΔCoVaR and EPU.

In this figure, we use ΔCoVaR to represent systemic risk in country level. We obtain ΔCoVaR by taking the weighted average of banks’ market value
in the corresponding country during the sample period. EPU is the arithmetic mean of the economic policy uncertainty index in each country. The
fitted curve shows an upward trend.
of the market values of banks in all countries. Note that systemic risk increases significantly when EPU increases.
3.5. Econometric framework
We analyse the effect of EPU on bank systemic risk. Our key variables are bank systemic risk and EPU index. Since EPU index is a
time-varying variable at the country level, we use the standard methodology introduced by Brunnermeier et al. (2020) and Duan et al.
(2021) to examine our hypotheses. Both studies use ordinary least squares regression with fixed effects in cross-country studies. We use
the following model to test Hypothesis 1a and Hypothesis 1b:
Systemic Riski,j,t = β1 EPU j,t− 1 + β2 Controli,j,t− 1 + Bank + Month + εi,j,t , (6)
where i, j indicates a bank i in country j, and t indicates a calendar month. The dependent variable Systemic_Riski,j,t represents the
systemic risk of bank i in country j at time t. Consistent with previous studies (Adrian and Brunnermeier, 2016; Brunnermeier et al.,
2020; Laeven et al., 2016), we use ΔCoVaR as an indicator of systemic risk. The results for other commonly used indicators, including
value at risk (VaR), marginal expected shortfall (MES) and SRISK, are shown in the robustness test and are consistent with the main
regression results. Following Berger et al. (2020), to reduce concerns about reverse causality, we lag the independent variable EPU by 1
month. EPUj,t-1 represents the economic policy uncertainty in country j, where bank i is located at time t-1. Controli,j,t-1 is a vector of
control variables, including country-level and bank-level characteristics that have been shown in previous studies to affect bank
systemic risk (Anginer et al., 2014; Bostandzic and Weiß, 2018; Brunnermeier et al., 2020; Laeven et al., 2016). In addition, we include
the bank fixed effect Bank and the month dummy Month in the regression model to control for omitted time-invariant bank charac
teristics and seasonality. We use robust standard errors that are adjusted for heteroscedasticity and are clustered by country and
year–month level to account for correlations of the error terms. εi,j,t is the random error.
8
Fig. 2. ΔCoVaR and EPU time varying diagram.

In this figure, we use ΔCoVaR to represent systemic risk aggregated by all countries. We obtain ΔCoVaR by taking the weighted average of the
monthly market value of banks in the sample countries. EPU is the world-month-level economic policy uncertainty index. Note that the level of
systemic risk increases significantly when EPU increases.
Table 4
The effect of EPU on systemic risk.
(1) (2) (3)
Dependent Variable: ΔCoVaR
EPU 0.543*** 0.330*** 0.361***

(5.64) (5.67) (5.36)
GDP Change − 0.102** − 0.103**
(− 2.78) (− 2.77)
Inflation 0.070*** 0.062**
(3.74) (2.82)
Total Assets 0.093 0.111
(1.10) (1.64)
Leverage 0.001 − 0.001
(0.33) (− 0.26)
ROA − 0.007* − 0.055**
(− 1.97) (− 2.73)
Asset Grow 0.004
(0.06)
LoanToAsset 0.226
(0.74)
InterestRatio 0.165*
(1.71)
LLP 0.008
(0.28)
Liquidity − 0.006**
(− 2.42)
Bank FE YES YES YES
Month FE YES YES YES
Observations 114,874 114,874 101,387
Adj R2 0.515 0.565 0.556
This table displays our main regression results. There are 114,874 bank-month level observations from 889 banks in 20
countries, over January 2000 to December 2020. We use ΔCoVaR to represent systemic risk. EPU is the country levele
conomic policy uncertainty index. Inflation is the consumer price index. GDP Change means the percentage change in
nominal GDP. Total Assets represents bank total assets. Leverage is the bank leverage. ROA is the average return on assets
(ROAA). Asset Grow is the bank total assets percentage change. LoanToAsset is the gross loan/bank total assets. InterestRatio
is the total interest income divided by operating revenue. LLP is the loan loss reserve ratio, defined as total loan loss
provision divided by gross loans. Liquidity is the liquidity asset to total deposits and funds. Standard errors are clustered at
the country and year-month level. The t-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and
10% levels, respectively.
9
To test Hypotheses 1a and 1b, we focus on the coefficient β1 of EPUj,t-1 in Eq. (6). If β1 is significantly positive, Hypothesis 1a holds;
if β1 is not significant, Hypothesis 1b holds. We adopt the following regression model to test Hypothesis 2:
Systemic Riski,j,t = β1 EPU j,t− 1 + β2 EPU j,t− 1 × Formalj,t− 1 + β3 Controli,j,t− 1 + Bank + Month + εi,j,t , (7)
where Formalj,t-1 includes a series of bank supervision variables. We use the Bank Supervision Survey developed by the World Bank to
determine formal supervision, including restrictions on banking activities (Act Restrict), capital regulation (Cap Reg), supervisory
power (Sup Power) and supervisory tolerance (Sup Forbear). Following Barth et al. (2013) and Yang et al. (2019), we use Survey I data
to obtain the values of the supervisory variables in 2001, Survey II data to obtain their values in 2002–2004, Survey III data to obtain
their values in 2005–2008, Survey IV data to obtain their values in 2009–2013, and Survey V data to obtain their values for the period
2014–2020. Survey V was completed in 2019. In untabulated analyses, we define the sample period corresponding to survey V as
2017–2020, and the main conclusions remain unchanged.
To test Hypothesis 2a, Hypothesis 2b Hypothesis 2c and Hypothesis 2d, we focus on the coefficient β2 of EPUj,t-1 × Formalj,t-1 in Eq.
(7). When the independent variables are restrictions on banking activities, capital regulation, supervisory power and supervisory
tolerance, the sign and significance of β2 will verify our hypothesis.
We design the following regression model to test Hypothesis 3a, 3b, 3c, 3d,3e, 3f and 3g:
Systemic Riski,j,t = β1 EPU j,t− 1 + β2 EPU j,t− 1 × Informalj,t− 1 + β3 Controli,j,t− 1 + Bank + Month + εi,j,t , (8)
We consider national culture variables as informal institutions. Following Berger et al. (2021b), we choose Hofstede’s (2001)
cultural dimensions of individualism (IDV), power distance (PDI), masculinity (MAS), uncertainty avoidance (UAI), and long-term
orientation (LTO) as national culture variables. We mainly focus on the interaction term of EPUj,t-1 and Informalj,t-1.
4. Results and discussion
4.1. EPU and systemic risk
Table 4 reports the regression results for Eq. (6). In column (1), we perform a univariate regression of systemic risk on EPU. We then
include country level and fundamental bank characteristic variables and all bank-level controls in columns (2) and (3), respectively.
The coefficients for EPU are positive and are statistically significant at the 1% level in all specifications. This finding suggests that
systemic risk increasing with EPU, and the result is consistent with Hypothesis 1a. In column (3), the coefficient 0.361 indicates that a
one-standard-deviation (0.461) increase in EPU results in an economically significant 15.2% (0.361*0.461/1.093) increase in ΔCoVaR
relative to its average value. These results confirm the statistical and economical empirical dominance of Hypothesis 1a over Hy
pothesis 1b.
The estimated coefficients of the control variables are basically as expected. Bank systemic risk is negatively correlated with GDP
Change, but it is positively correlated with Inflation, consistent with Brunnermeier et al. (2020). Regarding the bank-level variables, we
find that large banks have higher systemic risk. This is consistent with previous studies showing that failures of large banks cause
greater economic damage than failures of smaller banks, and thus large banks may exhibit higher systemic risk (Adrian and Brun
nermeier, 2016). Banks with higher ROA and greater liquidity tend to have less systemic risk. The coefficient of InterestRatio is positive
and significant at the 1% level, implying that banks that follow more traditional business models may be detrimental to financial sector
stability. Static leverage and loan loss reserve ratio have essentially no effect on systemic risk. Our findings suggest that EPU has a
strong effect on systemic risk even when other possible influencing factors are controlled for, confirming Baker et al.’s (2016) claim
that EPU has an independent effect.
4.2. Channels
In addition to verifying the impact of EPU on systemic risk, we studied the mechanism through which EPU affects bank systemic
risk.
From a bank’s perspective, we examine two channels through which EPU could affect systemic risk. The first is leverage risk, which
represents the risk of default on bank debt. Leverage risk has frequently been named a source of systemic risk. Under poor market
conditions, losses due to an adverse environment can quickly lead to undercapitalization of overleveraged banks; therefore, highly
leveraged banks can be systemically important (Bostandzic and Weiß, 2018). Shleifer and Vishny (2010) find that highly leveraged
banks increase both systemic risk and economic volatility. Beltratti and Stulz (2012) and Adrian and Brunnermeier (2016) further
demonstrate that during the financial crisis, highly leveraged banks had worse performance and contributed more to systemic risk than
did low-leveraged banks.
In addition, studies have shown that when EPU rises, banks’ stock market values decline due to factors such as decreased loan
growth and decreased bank profits (He and Niu, 2018). When a bank’s stock market value declines, its leverage level measured by
liabilities and market value increases, and its leverage risk thus increases. To capture the channel effect of bank leverage risk between
EPU and systemic risk, we use market leverage as our main proxy variable. We compute it as in Berg and Gider (2017) and Berger et al.
(2021a):
10
Market value of common equity

Leverage Risk = 1 − (9)
(End of year close price*shares outstanding) + Total liabilities
The second channel through which EPU could affect systemic risk is bank asset risk, which represents the overall risk level of the
assets held by a bank. On the one hand, banks with high asset risk are more likely to face a serious decline in asset value, insolvency and
bankruptcy during a crisis, thereby increasing systemic risk. On the other hand, Berg and Gider (2017) find that differences in asset risk
can explain up to 90% of the capital structure difference between banks and nonbanks. This means that, to some extent, lower asset risk
allows banks to maintain high leverage. When EPU rises, the profit obtained through borrowing enterprises decreases, and the risk of
loan default increases. As loans are an important share of bank assets, a rise in loan risk inevitably leads to a rise in bank asset risk. This
rise in bank asset risk directly increases the asset depreciation and the excessive leverage of banks during a crisis and thus leads to an
increase in their contribution to systemic risk. Following Berg and Gider (2017), we define asset risk as follows:
Standard deviation of daily stock return in last month
Asset Risk = (10)
Book leverage
Following Duan et al. (2021), we use a two-step regression approach to test the transmission channels. In the first step, we regress
leverage risk or asset risk on EPU and controls. In the second step, we examine the effect of the predicted value of leverage risk or asset
risk on systemic risk.
Columns (1) and (3) of Table 5 show the first-stage regression results for the leverage risk and asset risk channels, respectively. The
regression coefficients for EPU are all significantly positive at the 1% level, indicating that increased EPU leads to higher bank leverage
risk and higher bank asset risk. Columns (2) and (4) report the second-stage regression results for the leverage risk and asset risk
indicators, respectively. We find that the predicted values of leverage risk and asset risk have a positive and statistically significant
effect on systemic risk. Collectively, these results suggest that an increase in EPU has a positive impact on bank leverage risk and bank
asset risk thereby increasing systemic risk. This is consistent with our previous expectation based on the analysis of the literature
(Barua, 2021; Bordo et al., 2016; Chi and Li, 2017; Danisman et al., 2020).
Table 5
Risk transmission channels.
(1) (2) (3) (4)
Leverage Risk ΔCoVaR Asset Risk ΔCoVaR
EPU 0.012*** 0.397***

(3.34) (3.08)
Leverage Risk 29.679***
(3.81)
Asset Risk 0.911***
(5.05)
GDP Change − 0.001 − 0.076** − 0.155** 0.039**
(− 1.68) (− 2.57) (− 2.49) (1.94)
Inflation − 0.002 0.111** 0.023 0.041**
(− 1.62) (2.73) (0.63) (2.55)
Total Assets 0.000 0.127 − 0.353*** 0.432***
(0.10) (1.01) (− 3.46) (5.06)
Leverage 0.002*** − 0.067** 0.032* − 0.030**
(5.98) (− 2.54) (2.09) (− 2.67)
ROA − 0.006*** 0.120*** − 0.274*** 0.194**
(− 4.09) (2.89) (− 3.62) (2.80)
Asset Grow − 0.004 0.093 0.459*** − 0.414***
(− 0.81) (0.60) (3.62) (− 3.29)
LoanToAsset − 0.053*** 1.819*** 0.447 − 0.180
(− 5.16) (3.76) (1.10) (− 1.12)
InterestRatio 0.009** − 0.110 0.731*** − 0.501***
(2.40) (− 0.81) (5.19) (− 6.23)
LLP 0.000 0.007 0.184** − 0.160***
(0.12) (0.23) (2.21) (− 2.83)
Liquidity 0.000 − 0.011 − 0.005 − 0.001
(0.92) (− 1.29) (− 0.86) (− 0.31)
Bank FE YES YES YES YES
Month FE YES YES YES YES
Observations 90,660 90,660 101,355 101,355
Adj R2 0.769 0.556 0.119 0.556
This table shows how EPU increases systemic risk through the leverage risk and asset risk channels.
Our sample includes 889 banks from 20 countries, over January 2000 to December 2020. We use two-stage least squares regression models. Columns
(1) and (2) show the regression results of the leverage risk channel. And columns (3) and (4) show the regression results of the asset risk channel. We
use ΔCoVaR to represent systemic risk. EPU is the country level economic policy uncertainty index. LevRisk represents bank leverage risk and AssetRisk
represents bank asset risk. Standard errors are clustered at the country and year-month level. The t-statistics are in parentheses. ***, **, and * denote
significance at the 1%, 5%, and 10% levels, respectively.
11
4.3. Moderating role of formal and informal institutions
We use Eqs. (7) and (8) to examine how formal and informal regulations, respectively, shape the effect of systemic risk on EPU.
Table 6 presents the regression results for Eq. (7). The interaction term of Sup Forbear and EPU is negatively significant at the 5%
level (column (4)), indicating that higher regulatory tolerance mitigates the elevated systemic risk posed by EPU. This is consistent
with the findings of Ahamed and Mallick (2017). However, we do not find evidence that banking activity restrictions (column (1)),
capital regulations (column (2)) or supervisory power (column (3)) shape the relation between EPU and systemic risk, meaning that
these regulatory measures have no significant impact on the systemic risk posed by EPU. These results are consistent with Hypotheses
2c and 2d in that banking regulatory requirements such as restrictions on banking activities, capital requirements and supervisory
powers do not affect the impact of EPU on bank systemic risk and in that greater regulatory tolerance helps reduce the negative effects
of EPU. This finding has important policy implications for regulators and policymakers. For example, when faced with high EPU, it may
be more conducive to the stability of the financial system to provide a greater degree of regulatory tolerance than to adjust policies
related to restrictions on banking activities, capital requirements, and regulatory powers.
Similarly, to test Hypothesis 3a to Hypothesis3f, we estimated the regression model in Eq. (8).
Table 7 reports the results on how informal rules shape the effect of systemic risk on EPU. It can be seen that the coefficient of EPU
× IDV is significantly positive, indicating that banking systems in societies with more individualistic cultures will contribute more
systemic risk during periods of high EPU. This is consistent with Hypothesis 3a and supports previous conclusions in the literature
regarding the impact of individualistic culture on bank risk (Berger et al., 2020; Yang et al., 2019). The empirical results support the
hypothesis we proposed in the literature review section; that is, during a period of high EPU, higher risk preference related to indi
vidualistic culture will cause more serious losses to banks, increase the possibility of a bank crisis, and lead to an increase in systemic
risk.
Furthermore, we find that the coefficient of EPU × PDI is negative and statistically significant at the 1% level, implying that higher
Table 6
The moderating role of the regulatory environment.
(1) (2) (3) (4)
EPU 0.353*** 0.442*** 0.427*** 0.459***

(5.06) (5.08) (6.06) (7.09)
Act Restrict × EPU − 0.027
(− 0.42)
Cap Reg × EPU 0.001
(0.01)
Sup Power × EPU 0.070
(1.38)
Sup Forbearance × EPU − 0.412**
(− 2.24)
GDP Change − 0.109** − 0.116** − 0.115** − 0.107**
(− 2.70) (− 2.51) (− 2.53) (− 2.42)
Inflation 0.057** 0.053** 0.072*** 0.073**
(2.42) (2.12) (4.46) (2.12)
Total Assets 0.127* 0.029 0.157** 0.139
(1.91) (0.39) (2.60) (1.39)
Leverage − 0.001 − 0.002 0.002 0.001
(− 0.46) (− 0.57) (0.56) (0.21)
ROA − 0.052** − 0.039** − 0.053*** − 0.038**
(− 2.48) (− 2.12) (− 4.77) (− 2.23)
Asset Grow 0.009 0.093 − 0.042 − 0.044
(0.13) (1.21) (− 0.78) (− 0.51)
LoanToAsset 0.289 0.270 0.419** 0.602
(0.99) (0.83) (2.58) (1.47)
InterestRatio 0.154 0.275*** 0.107 0.251***
(1.50) (3.02) (1.04) (3.87)
LLP 0.008 0.010 − 0.010 − 0.011
(0.31) (0.42) (− 0.29) (− 0.40)
Liquidity − 0.007** − 0.007** − 0.004* − 0.004
(− 2.60) (− 2.56) (− 1.80) (− 1.56)
Bank FE YES YES YES YES
Month FE YES YES YES YES
Observations 95,948 88,602 79,222 74,008
Adj R2 0.553 0.557 0.560 0.593
This table displays the mitigation effects of EPU from banking regulation. We use ΔCoVaR to represent systemic risk. EPU is the country level eco
nomic policy uncertainty index. Act Restrict represents overall restrictions on banking activities; Cap Reg measures capital requirements for banks. Sup
Power measures whether the regulator has the authority to take specific action to prevent and correct the problem; Sup Forbearance stands for reg
ulatory tolerance. Standard errors are clustered at the country and year-month level. The t-statistics are in parentheses. ***, **, and * denote sig
nificance at the 1%, 5%, and 10% levels, respectively.
12
Table 7
The moderating role of national culture.
(1) (2) (3) (4) (5)
EPU 0.366*** 0.384*** 0.362*** 0.364*** 0.355***

(3.93) (5.07) (5.35) (5.85) (4.11)
IDV × EPU 0.009***
(4.64)
PDI × EPU − 0.012***
(− 3.19)
MAS × EPU 0.001
(0.19)
UAI × EPU 0.001
(0.28)
LTO × EPU − 0.008***
(− 2.88)
GDP Change − 0.105*** − 0.105*** − 0.103*** − 0.103** − 0.102**
(− 2.85) (− 2.83) (− 2.76) (− 2.78) (− 2.75)
Inflation 0.069*** 0.071*** 0.063*** 0.063*** 0.062**
(3.08) (3.27) (2.79) (2.88) (2.59)
Total Assets 0.111* 0.109 0.111 0.112* 0.103
(1.74) (1.67) (1.64) (1.76) (1.49)
Leverage 0.000 − 0.000 − 0.001 − 0.001 0.001
(0.10) (− 0.07) (− 0.28) (− 0.31) (0.25)
ROA − 0.048** − 0.050** − 0.056** − 0.056** − 0.048**
(− 2.48) (− 2.59) (− 2.74) (− 2.72) (− 2.47)
Asset Grow − 0.019 − 0.026 0.003 0.003 − 0.015
(− 0.30) (− 0.44) (0.05) (0.05) (− 0.23)
LoanToAsset 0.306 0.287 0.224 0.226 0.310
(1.22) (1.11) (0.74) (0.74) (1.22)
InterestRatio 0.196* 0.188* 0.164* 0.164 0.179*
(1.87) (1.85) (1.69) (1.71) (1.83)
LLP 0.006 0.005 0.008 0.008 0.004
(0.24) (0.18) (0.28) (0.29) (0.13)
Liquidity − 0.006** − 0.007** − 0.006** − 0.006** − 0.006***
(− 2.70) (− 2.70) (− 2.32) (− 2.41) (− 2.56)
Bank FE YES YES YES YES YES
Month FE YES YES YES YES YES
Observations 101,387 101,387 101,387 101,387 101,387
Adj R2 0.564 0.562 0.556 0.556 0.562
This table displays the mitigation effects of EPU from national culture. We use ΔCoVaR to represent systemic risk. EPU is the country level economic
policy uncertainty index. IDV represents individualism; PDI represents power distance; MAS represents masculinity; UAI and LTO represent uncer
tainty avoidance and long-term orientation, respectively. Standard errors are clustered at the country and year-month level. The t-statistics are in
parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
power distance can help mitigate the adverse effects of high EPU on systemic risk. This is consistent with Hypothesis 3b. The effect may
be due to the greater power distance, indicating that subordinates are more obedient to their superiors. Therefore, in times of high EPU,
mitigation measures proposed by superiors can be implemented more effectively, thereby reducing the level of systemic risk (Berger
et al., 2020; Duan et al., 2021).
We do not find evidence that masculinity (column (3)) or uncertainty avoidance (column (4)) change the relation between EPU and
systemic risk; therefore, Hypotheses 3c, 3d, 3e and 3f are not supported.
The interaction term of LTO and EPU is negatively significant at the 1% level (column (5)). This is consistent with Hypothesis 3g
and suggests that EPU has a weaker effect on bank systemic risk in countries with higher long-term orientation. This may be because
people in long-term-oriented cultures value long-term development more than they value short-term interests, resulting in less irra
tional behaviour when short-term EPU rises. In conclusion, the presence of a higher power distance culture or a long-term orientation
culture helps mitigate the systemic risk posed by EPU, while a prominent culture of individualism exacerbates the impact of EPU on
financial system stability. However, the presence of a masculinity or uncertainty avoidance culture does not mitigate the impact of EPU
on bank systemic risk.
4.4. Heterogeneity test
In the following heterogeneity analysis, we mainly explore how the effects of EPU differ in subsamples with specific bank or country
characteristics.
4.4.1. The role of bank size

In existing studies, bank size is generally considered the main driver of systemic risk. Large bank managers have an incentive to take
13
excessive risks, and as a result, larger banks have higher risk levels than do smaller banks (Acharya and Yorulmazer, 2008). In addition,
larger banks typically have more complex asset compositions and are more interconnected and less fungible than smaller banks. When
there is a default event, large banks tend to suffer more severe losses than do smaller banks, and their losses have severe repercussions
for the financial system. Therefore, in a high EPU environment, large banks may be associated with more serious systemic risks than
small banks are.
Consistent with previous studies, the regression coefficient of Total Assets in Table 4 is positive and nearly reaches statistical
significance, suggesting that larger banks are more likely to have higher systemic risk. To test whether the relationship between EPU
and systemic risk differs across banks of different sizes, we divide our sample into large and small banks based on median total assets
and then perform regressions in each subsample.
Columns (1) and (2) of Table 8 show the estimated coefficients for the two groups. The systemic risk of larger banks is more
sensitive to EPU than smaller banks, and the coefficient difference of EPU is statistically significant (z-statistic = 2.94), indicating that
larger banks are more susceptible to EPU.
4.4.2. Developed and developing countries

We also consider the heterogeneous impact of country-level characteristics. For example, we examine the systemic risk response to
EPU of banks in developed and developing countries. There are significant differences between developed and developing countries in
terms of market maturity and policy implementation methods. In developed countries, the market is the central hub of economic
operation, and enterprises enjoy considerable operational autonomy in resource allocation. At the same time, the government’s
macroeconomic control is mainly focused on fiscal and monetary policy, and direct intervention in the economy is less used. Devel
oping countries often have problems such as imperfect market systems and low market efficiency. In developing countries, market
participants such as banks and enterprises do not perform as well as those in developed countries in terms of market participation and
efficiency, but they also experience relatively fewer losses caused by excessive participation in the market in periods of high EPU.
Columns (3) and (4) of Table 8 show the estimated coefficients for the two groups. The coefficient on EPU is larger for banks in
developed countries than for banks in developing countries, and the difference is statistically significant at the 1% level (z statistic =
Table 8
Heterogeneity test.
High Asset Low Asset Developed Developing High Free Low Free During Crisis No Crisis
(1) (2) (3) (4) (5) (6) (7) (8)
EPU 0.492*** 0.263*** 0.404*** 0.160 0.357*** 0.227** 1.423*** 0.354***

(5.29) (4.82) (6.74) (1.94) (7.26) (2.62) (5.54) (5.23)
GDP Change − 0.130** − 0.057*** − 0.127*** − 0.041*** − 0.137*** − 0.046*** 0.092*** 0.047**
(− 2.68) (− 5.42) (− 3.30) (− 4.20) (− 3.37) (− 3.67) (3.35) (2.81)
Inflation 0.061** 0.046*** 0.087** 0.055*** 0.088*** 0.057*** − 0.028 − 0.054**
(2.51) (4.03) (2.98) (9.13) (3.28) (3.86) (− 0.79) (− 2.23)
Total Assets − 0.045 0.157 0.178*** − 0.412*** 0.176*** (18.45) − 0.470*** 0.376 0.197***
(− 1.50) (1.20) (16.19) (− 5.11) (18.45) (− 4.22) (1.65) (7.31)
Leverage 0.005 − 0.003 − 0.001 0.003 − 0.001 0.007 − 0.000 0.000
(1.19) (− 1.15) (− 0.46) (0.54) (− 0.41) (1.54) (− 0.05) (0.00)
ROA − 0.072*** − 0.040** − 0.036* − 0.024 − 0.042** 0.009 − 0.002 − 0.002
(− 3.41) (− 2.49) (− 1.85) (− 1.58) (− 3.06) (0.57) (− 0.18) (− 0.13)
AssetGrow 0.025 − 0.083 − 0.045 − 0.114 0.045 − 0.329* − 0.107 − 0.102*
(0.34) (− 1.62) (− 0.63) (− 0.83) (0.61) (− 2.19) (− 1.01) (− 2.09)
LoanToAsset 0.235 0.052 0.239 − 1.209** 0.528*** − 1.076** 0.199 − 0.022
(0.44) (0.33) (0.79) (− 2.81) (3.64) (− 2.89) (0.49) (− 0.09)
InterestRatio 0.438*** 0.049 0.182 0.105 0.103 0.258** − 0.308*** 0.005
(4.40) (0.71) (1.35) (1.46) (1.03) (2.38) (− 3.98) (0.10)
LLP 0.019 − 0.018 0.051* − 0.041** 0.091** − 0.036*** 0.104** 0.009
(0.64) (− 1.33) (1.82) (− 2.66) (2.87) (− 3.68) (2.63) (0.39)
Liquidity − 0.009*** − 0.006** − 0.008*** − 0.003 − 0.005 − 0.013*** − 0.013** − 0.002
(− 3.02) (− 2.20) (− 3.49) (− 1.27) (− 1.64) (− 3.66) (− 2.76) (− 0.67)
Coef DIFF P < 0.01 P < 0.01 P = 0.186 P < 0.01
Bank FE YES YES YES YES YES YES YES YES
Month FE YES YES YES YES YES YES YES YES
Observations 54,918 46,468 91,725 9662 83,311 18,076 15,856 85,531
Adj R2 0.451 0.653 0.574 0.499 0.560 0.548 0.704 0.614
This table shows the heterogeneity test of EPU on systemic risk. All variables are described in Appendix A. Columns (1) and (2) show the regression
results of empirical model (1) for banks with total assets higher than the median and banks with total assets lower than the median, respectively.
Columns (3) and (4) show the regression results of empirical model (1) for banks in developed countries and banks in developing countries,
respectively. Columns (5) and (6) show the regression results of empirical model (1) for banks in countries with higher economic freedom and banks
in countries with lower economic freedom, respectively. Columns (7) and (8) show the regression results of empirical model (1) for the time period
during the crisis and the time period not during the crisis, respectively. Standard errors are adjusted for clustering at the bank and year-month level.
The t-statistics are in parentheses. ***, **, and * denote significance at the 1%, 5%, and 10% levels, respectively.
14
2.88), indicating that the contribution of developed countries’ banks to systemic risk is more sensitive to EPU than banks in developing
countries.
4.4.3. High or low economic freedom

The degree of economic freedom also affects banks and individuals in the economy and may affect their attitudes towards EPU,
resulting in different effects of EPU on systemic risk. To examine whether the relationship between EPU and systemic risk is affected by
the degree of economic freedom, following Justesen (2008), we divide the sample into countries in which there is high economic
freedom and countries in which there is low economic freedom based on the median economic freedom index value and then perform
regressions in each subsample.
We use the Economic Freedom Annual Index created in 1995 by the Heritage Foundation and Wall Street to measure the level of
economic freedom in countries around the world (website: https://www.heritage.org/index/ranking). Columns (5) and (6) of Table 8
present the estimated coefficients for the two groups. The coefficient on EPU is higher for banks in countries with high economic
freedom index values than for those in countries with low economic freedom index values, but the difference is not statistically sig
nificant. This means that the degree of market freedom cannot explain banks’ systemic risk in different countries during periods of high
EPU.
4.4.4. Crisis and noncrisis periods

We examine the impact of EPU on systemic risk in times of crisis. The crisis period is defined as 2007–2009, we also test different
definitions in a robustness check, and the results are consistent. Columns (7) and (8) of Table 8 present the estimated coefficients for
the two groups. The coefficient of EPU in the crisis period (1.423) is significantly higher than that in the noncrisis period (0.354),
suggesting that in times of crisis, EPU can lead to more serious systemic risks for banks. This means that in times of crisis, policymakers
should pay more attention to the impact of EPU on bank systemic risk.
4.5. Further discussion
In this section, we measure the spillover effects of EPU across sample countries. We focus on whether there are obvious EPU
spillover effects among countries, which countries are more likely to export uncertainty to other countries and which countries are
more vulnerable to uncertainty in other countries. Considering that we have demonstrated that EPU has a significantly positive effect
on bank systemic risk, a discussion of the spillover effects of EPU may enrich our understanding of the channels for transnational
contagion of systemic risk.
Following Diebold and Yilmaz (2012), we use the EPU index for 19 countries2 in our sample to calculate the economic uncertainty
spillover index. The index is based on standard variance decompositions in vector auto regressions, allowing us to estimate pairwise
directional spills and to further aggregate them into a consistent single measure (Klößner and Sekkel, 2014). However, it is worth
noting that, as mentioned in Diebold and Yilmaz (2012), the purpose of the SOI method is to test the overall direction of EPU spillovers
among all countries in the sample rather than to draw causal inferences, because we cannot identify structural channels.
Table 9 presents the results. It can be found that there are obvious spillover effects of EPU among countries. On average,
approximately 50% of countries’ EPU can be explained by shocks originating in other countries. From the perspective of the supply
side of EPU, all countries that exhibit spillover effects >50% are developed countries. In particular, the spillover effect of EPU in the
USA is 103.1% — much greater than that of other countries. The average spillover from developed countries to other countries is
58.5%, much higher than the average spillover from developing countries (26.35%).
Therefore, EPU in developed countries is more likely to spill over to other countries. Spillovers from the U.S. to closely linked
countries such as Canada, South Korea and Mexico all exceed 10%, consistent with the hypothesis that countries with closer links are
more vulnerable to spillovers from EPU in other countries. China and Russia have the weakest spillover effects on the EPU of other
countries; their percentage values are 5.7% and 8.4%, respectively. At the same time, they are also the countries that are least affected
(2.9% and 4.6%, respectively) by economic policy uncertainty in other countries. More than 90% of their EPU arises from domestic
sources. This shows that China and Russia are relatively resistant to uncertainty caused by economic policies in other countries.
As discussed in the previous section, an increase in EPU will result in an increase in systemic risk. Through the tests performed in
this section, we find that a country’s EPU arises not only from domestic sources but also may be affected by other countries around the
world and that the degree of influence of different countries differs significantly. Therefore, it is necessary for countries to take
appropriate measures to address the spillover effects of EPU in other countries and the resulting systemic risk.
4.6. Robustness tests
In this section, we perform a robustness check of the main conclusions reached in this paper. To do this, we use other commonly
used systemic risk indicators, including MES, VaR, and SRISK, as proxy variables for bank systemic risk. MES is the marginal expec
tation shortage (Acharya et al., 2017), and VaR represents individual banks’ tail risk. SRISK is another commonly used indicator of
systemic risk, which measures how much capital a bank needs to maintain a given capital adequacy ratio in times of crisis. Following
2
The earliest data on Singapore’s EPU index became available from January 2003, later than the data for other countries. To ensure time balance
across the sample, we remove Singapore from the sample in this section.
15
Y. Duan et al.
Table 9
International spillover effect of EPU.
DNK
GBR
CHL
DEU
KOR
SWE
AUS
FRA
GRC
JPN
RUS
Country
CAN
COL
IND
USA
Fromothers
CHN
ESP
ITA
MEX
AUS 36.27 5.44 3.27 0.09 1.24 4.21 3.61 2.84 2.02 5.29 4.81 6.83 0.77 6.35 4.53 2.91 0.05 2.96 6.54 63.7
CAN 5.62 37.51 2.15 0.01 4.6 5.97 1.11 2.23 5.86 5.9 2.32 0.91 1.96 2.82 4.55 2.61 0.05 2.74 11.09 62.5
CHL 4.56 2.9 50.53 0.01 3.21 3.41 0.86 2.05 3.17 2.09 3.67 2.05 2.09 3.84 3.39 2.16 0.01 5.13 4.86 49.5
CHN 0.24 0.01 0.02 94.27 0.08 0.35 0.01 0.36 0.05 0.07 0 0.03 0 0.43 0.43 0.37 0.25 2.25 0.78 5.7
COL 1.7 6.14 3.18 0.04 50.05 4.63 1.29 1.52 1.63 4.08 2.72 0.83 0.47 3.57 4.46 4.07 0 1.65 7.96 50
DEU 4.49 6.16 2.62 0.15 3.58 38.73 2.64 4 8 7.5 3.27 0.82 1.32 2.62 3.53 0.27 0.41 2.55 7.34 61.3
DNK 5.99 1.79 1.03 0.01 1.55 4.1 60.2 3.7 3.22 1.78 0.96 1.22 0.76 4.76 2.09 0 0.67 1.8 4.37 39.8
ESP 3.9 2.96 2.03 0.19 1.51 5.15 3.06 49.84 4.3 3.6 2.35 3.1 4.05 2.51 2.57 0.4 1.6 2.8 4.09 50.2
16
FRA 2.32 6.53 2.62 0.02 1.36 8.62 2.24 3.6 41.78 7.13 2.64 0.09 4.34 1.91 4.61 0.76 0.01 2.01 7.4 58.2
GBR 6 6.47 1.7 0.03 3.36 7.97 1.22 2.98 7.02 41.15 2.83 0.39 2.2 1.3 6.26 0.66 0.02 0.88 7.59 58.9
GRC 6.52 3.05 3.57 0 2.67 4.15 0.78 2.32 3.11 3.38 49.18 2.05 2.37 4.24 2.16 4.75 0.04 3.2 2.47 50.8
IND 10.62 1.36 2.29 0.02 0.94 1.2 1.15 3.51 0.13 0.54 2.35 56.44 1.97 9.05 2.12 0.11 0.38 2.85 2.98 43.6
ITA 1.25 3.08 2.44 0 0.56 2.01 0.75 4.8 6.13 3.15 2.85 2.06 59.02 4.36 2.28 0.66 0.1 1.83 2.68 41
JPN 7.75 3.32 3.36 0.2 3.15 2.99 3.5 2.22 2.02 1.39 3.81 7.09 3.27 44.25 2.11 0.46 0.02 4.83 4.22 55.7
KOR 5.12 4.97 2.75 0.19 3.65 3.73 1.42 2.11 4.52 6.23 1.8 1.54 1.58 1.95 40.95 3.17 0.6 1.36 12.36 59
MEX 4.62 4.01 2.47 0.23 4.69 0.41 0 0.46 1.05 0.92 5.57 0.11 0.64 0.6 4.46 57.63 0.23 1.06 10.84 42.4
RUS 0.13 0.12 0.02 0.24 0 0.97 1.02 2.94 0.01 0.05 0.08 0.62 0.15 0.04 1.35 0.36 91.6 0.15 0.13 8.4
SWE 4.19 3.75 5.21 1.22 1.69 3.37 1.53 2.88 2.47 1.1 3.34 2.59 1.59 5.6 1.7 0.94 0.09 51.31 5.42 48.7
USA 5.49 9 2.93 0.25 4.84 5.77 2.21 2.5 5.39 5.61 1.53 1.61 1.38 2.91 9.18 5.72 0.04 3.21 30.43 69.6
To Others 80.5 71.1 43.6 2.9 42.7 69 28.4 47 60.1 59.8 46.9 33.9 30.9 58.8 61.8 30.4 4.6 43.3 103.1 918.9
Pacific-Basin Finance Journal 75 (2022) 101828

This tables provide estimates (%) of the spillovers for the period January 2000 to December 2020 between 19 countries. Each country receives from (rows) and transmits to (columns) another country. The
table also shows the total spillovers that each country transmits to all other countries (contribution to other countries), and the spillovers that each country receives from all other countries (from other
countries).
Brownlees and Engle (2017), we construct SRISK as follows:

( ⃒ )
SRISK i,t = E Capital Shortfalli,t ⃒Crisis
( ( ) ⃒ )
= E k Debti,t + Equityi,t –Equityi,t ⃒Crisis
( )
= kDebti,t − (1 − k) 1–LRMESi,t × Equityi,t (11)
Considering that banks with more total assets are more likely to have larger capital shortages, we standardize SRISK by total assets.
Therefore, SRISK captures the amount of capital that needs to be replenished per unit of assets in banks during the crisis. The results,
which are presented in Appendix B1, show that across all regressions, the EPU coefficient remains positive at the 1% significance level
and with economic significance, further supporting our conclusions.
In addition, we assessed the robustness of our main evidence to the use of different subsamples. As shown in Table 1, the U.S. bank
observations in the sample represent more than half of the total number. To avoid bias due to the overrepresentation of U.S. banks in
the results, we run Eq. (6) excluding those banks. Appendix B2 presents the regression results. Our main findings hold when excluding
U.S. banks. The coefficient on EPU decreases slightly but is still positive and statistically significant.
Furthermore, to eliminate a possible impact of the unusual market turmoil that occurred during the period 2007–2009 on the
results, we remove the observations for these 3 years and rerun the regression in untabulated analyses, and the results remain stable.
Through the above tests, we confirm that EPU leads to an increase in bank systemic risk and verify that this effect is both economically
and statistically significant.
5. Conclusion
In this paper, using data from 889 listed banks in 20 countries for the period January 2000–December 2020, we conduct the first
extensive international study of the impact of EPU on bank systemic risk. The empirical results show that EPU increases systemic
vulnerability through the channels of bank leverage risk and bank asset risk. This effect is both statistically significant and econom
ically significant. Each standard deviation increase in EPU (0.461) resulted in a 15.2% increase in ΔCoVaR relative to its average value.
Our results remain robust when systemic risk proxies are changed and when different subsamples are used.
Furthermore, we examine how banking supervision and national culture moderate the impact of EPU on systemic risk. The results
suggest that regulatory forbearance helps mitigate banks’ systemic risk during periods of high EPU. In addition, higher power distance
and greater long-term orientation in national cultures help mitigate the systemic risks posed by EPU, while the presence of a prominent
culture of individualism aggravates the adverse impact of EPU on the stability of the financial system. We further conduct hetero
geneity analyses to explore how the effects of EPU differ across subsamples. We find that banks located in developed countries, larger
countries, or countries that are experiencing times of crisis are more sensitive to EPU.
Finally, we examine the spillover effect of EPU among the sampled countries and show that EPU has an obvious spillover effect
among countries and that it mainly spills over from developed countries to developing countries.
We believe our findings have implications for guiding policymakers and regulators to prevent and respond to systemic risk. First,
we find that the rise of economic policy uncertainty (EPU) can lead to a significant increase in systemic risk. The government or
competent authorities should establish a dynamic monitoring and early response system to detect and respond to large fluctuations in
EPU and the consequent systemic risk. Second, formal bank regulations (e.g., the regulatory environment) and informal institutions (e.
g., national culture) may mitigate or exacerbate the systemic risk caused by EPU. Considering that national culture is not directly
controlled by the government and is difficult to change in the short term, it may be helpful for the government to take measures to
adjust the regulatory environment to reduce the adverse impact of EPU on the stability of the banking system. Third, EPU has obvious
spillover effects among countries, and it mainly spills over from developed countries to developing countries. Countries, especially
developing countries, should pay more attention to the EPU of other closely related countries and take appropriate countermeasures to
mitigate the impact of the spillover of EPU on the stability of their own financial systems.
Our findings also suggest potential ideas for future research. Considering that systemic risk can arise through the interconnec
tedness of banks, it may be of interest to examine how EPU affects interconnected networks of banks and how this affects systemic risk.
Author statement
We made substantial contributions to the conception or design of the work, or the acquisition, analysis, or interpretation of data for
the work together. Yuejiao Duan and Yu Wang drafted the work or revised it critically for important intellectual content and approved
the final version to be published. All persons who have made substantial contributions to the work reported in the manuscript,
including those who provided writing assistance but who are not authors, are named in the Acknowledgments section. We agree to be
accountable for all aspects of the work in ensuring that questions related to any part of the work are appropriately investigated and
resolved.
Declarations of interest
None.
17
Acknowledgements
The authors thank anonymous referees, and gratefully acknowledge the research support from Nankai University, Grant No.
ZX20220073 and the Ministry of Education of China, Grant No. 21YJC790067.
Appendix A. Variable definitions
Table A1
Variable definitions.
Variable Definition Source

Name
Dependent Variables
ΔCoVaR Change in the conditional value at risk, following Adrian and Brunnermeier (2016). Compustat, CRSP
MES Marginal expected shortfall, following Brownlees and Engle (2017).
VaR Value at risk.
SRISK Capital shortfall of a bank when the market falls severely, following Brownlees and Engle (2017).
Independent Variables
EPU The natural logarithm of the arithmetic mean of the overall EPU index. BBD website http://www.
policyuncertainty.com
Total Assets The natural logarithm of bank total assets. Compustat, CRSP
Leverage Sum of the market value of equity and book liabilities divided by the market value of equity.
ROA Return on average asset (ROAA).
Asset Grow The rate of change in the bank’s total assets.
Inflation The consumer price index (CPI). World Development Indicators
GDP Change Nominal gross domestic product percentage change.
LoanToAsset Gross loan divided by bank’s total assets. Bankscope Orisis
InterestRatio Total interest income divided by operating revenue.
LLP Loan loss reserve ratio.
Liquidity Liquidity asset to total deposit and fund.
Act Restrict Measures the ability of banks to carry out activities in the securities underwriting, insurance and real Bank Regulation and Supervision
estate business areas. Survey
Cap Reg Capital requirements for banks.
Sup Power Measures the power of regulators to take specific actions to prevent and correct problems.
Sup Forbear Regulatory tolerance.
PDI Power distance, which indicates the degree to which the weaker expect and accept an unequal
distribution of power.
IDV Individualism, which indicates the extent a society emphasizes the role of individual. Hofstede’s cultural dimensions
MAS Masculinity vs. femininity, measure the degree to which “male self-confidence” is promoted as a
socially dominant value.
UAI Uncertainty avoidance, which refers to a cultural index of tolerance for uncertain, unknown, or
unstructured situations.
LTO Long-term vs. short-term refers to the degree to which society attaches importance to long-term
benefits compared to short-term benefits.
Appendix B. Robustness test
Table B1
Robustness test: alternative dependent variables.
(1) (2) (3) (4) (5) (6)
MES VaR SRISK
EPU 0.831*** 0.434*** 1.000*** 0.560*** 0.017*** 0.003***

(4.11) (3.49) (3.30) (3.52) (4.61) (5.07)
Inflation 0.072* 0.031 0.000
(2.01) (0.88) (0.01)
GDP Change − 0.157** − 0.185*** − 0.000*
(− 2.59) (− 2.98) (− 1.79)
Total Assets 0.216 − 0.377*** 0.002***
(1.54) (− 2.96) (3.18)
Leverage 0.009* 0.036** 0.001***
(1.77) (2.11) (5.18)
(continued on next page)
18
Table B1 (continued )
(1) (2) (3) (4) (5) (6)
MES VaR SRISK
ROA − 0.169*** − 0.355*** − 0.002***

(− 4.08) (− 4.65) (− 4.84)
Asset Grow 0.162 0.642*** − 0.011**
(1.12) (5.25) (− 2.74)
LoanToAsset 0.538 0.214 − 0.006*
(1.39) (0.46) (− 1.81)
InterestRatio 0.222* 0.835*** 0.002**
(1.77) (5.09) (2.65)
LLP 0.084 0.156* 0.001*
(1.50) (1.87) (1.87)
Liquidity − 0.008* − 0.007 − 0.000
(− 1.84) (− 1.25) (− 0.06)
Bank FE YES YES YES YES YES YES
Month FE YES YES YES YES YES YES
Observations 114,874 101,387 114,874 101,387 114,874 101,387
Adj R2 0.453 0.520 0.221 0.419 0.407 0.861
This table displays the robustness tests of our main regression results by using alternative systemic risk variables. The sample includes 889 banks from
20 countries, over January 2000 to December 2020. MES and SRISK are proxy variables for systemic risk; VaR represents individual bank tail risk; EPU
is the country level economic policy uncertainty index. Inflation is the consumer price index. GDP Change means the percentage change in nominal
GDP. Total Assets represents bank total assets. Leverage is the bank leverage. ROA is the average return on assets (ROAA). Asset Grow is the bank total
assets percentage change. LoanToAsset is the gross loan divided by bank total assets. InterestRatio is the total interest income divided by operating
revenue. LLP is the loan loss reserve ratio, defined as total loan loss provision divided by gross loans. Liquidity is the liquidity asset to total deposits and
funds. Standard errors are clustered at the country and year-month level. The t-statistics are in parentheses. ***, **, and * denote significance at the
1%, 5%, and 10% levels, respectively.
Table B2
Robustness test: subsample.
(1) (2) (3)
EPU 0.376*** 0.311*** 0.295***

(3.49) (3.09) (3.02)
Inflation 0.072*** 0.047***
(4.06) (3.07)
GDP Change − 0.056*** − 0.058***
(− 4.15) (− 5.10)
Total Assets − 0.342*** − 0.412***
(− 3.37) (− 4.31)
Leverage 0.003 0.004
(0.66) (0.74)
ROA − 0.004 0.007
(− 0.25) (0.61)
Asset Grow 0.058
(0.43)
LoanToAsset − 0.963***
(− 3.00)
InterestRatio 0.380***
(4.04)
LLP − 0.012
(− 0.94)
Liquidity − 0.009***
(− 3.73)
Bank FE YES YES YES
Month FE YES YES YES
Observations 43,433 43,433 37,720
Adj R2 0.496 0.545 0.575
This table displays the robustness tests of our main regression results in subsample which exclude
USA banks. The subsample includes 326 banks from 19 countries over January 2000-December
2020. We use ΔCoVaR to represent systemic risk. EPU is the country level economic policy uncer
tainty index. Inflation is the consumer price index. GDP Change means the percentage change in
nominal GDP. Total Assets represents bank total assets. Leverage is the bank leverage. ROA is the
average return on assets (ROAA). Asset Grow is the bank total assets percentage change. LoanToAsset
is the gross loan divided by bank total assets. InterestRatio is the total interest income divided by
operating revenue. LLP is the loan loss reserve ratio, defined as total loan loss provision divided by
gross loans. Liquidity is the liquidity asset to total deposits and funds. Standard errors are clustered at
19
the country and year-month level. The t-statistics are in parentheses. ***, **, and * denote signifi
cance at the 1%, 5%, and 10% levels, respectively.
References
Acharya, V.V., Kulkarni, N., 2012. What saved the indian banking system: state ownership or state guarantees? World Econ. 35, 19–31.
Acharya, V.V., Yorulmazer, T., 2008. Cash-in-the-market pricing and optimal resolution of bank failures. Rev. Financ. Stud. 21, 2705–2742.
Acharya, V.V., Pedersen, L.H., Philippon, T., Richardson, M., 2017. Measuring systemic risk. Rev. Financ. Stud. 30, 2–47.
Adrian, T., Brunnermeier, M., 2016. CoVaR. Am. Econ. Rev. 106, 1705–1741.
Ahamed, M.M., Mallick, S., 2017. Does regulatory forbearance matter for bank stability? Evidence from creditors’ perspective. J. Financ. Stab. 28, 163–180.
Anginer, D., Demirguc-Kunt, A., Zhu, M., 2014. How does competition affect bank systemic risk? J. Financ. Intermed. 23, 1–26.
Ashraf, B.N., Zheng, C., Arshad, S., 2016. Effects of national culture on bank risk-taking behavior. Res. Int. Bus. Financ. 37, 309–326.
Baker, S., Bloom, N., 2013. Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments, NBER Working Papers 19475. National Bureau of Economic
Research, Cambridge, MA.
Baker, S.R., Bloom, N., Davis, S.J., 2016. Measuring economic policy uncertainty. Q. J. Econ. 131, 1593–1636.
Barth, J.R., Caprio, G., Levine, R., 2004. Bank regulation and supervision: what works best? J. Financ. Intermed. 13, 205–248.
Barth, J.R., Caprio, G., Levine, R., 2013. Bank regulation and supervision in 180 countries from 1999 to 2011. J. Financ. Econ. Policy 5, 111–219.
Barua, S., 2021. Understanding coronanomics: the economic implications of the COVID-19 pandemic. J. Dev. Areas 55, 435–450.
Beck, T., Keil, J., 2021. Are banks catching corona? Effects of COVID on lending in the US. Available at SSRN 3805284.
Bellucci, A., Borisov, A., Zazzaro, A., 2010. Does gender matter in bank–firm relationships? Evidence from small business lending. J. Bank. Financ. 34, 2968–2984.
Beltratti, A., Stulz, R.M., 2012. The credit crisis around the globe: why did some banks perform better? J. Financ. Econ. 105, 1–17.
Berg, T., Gider, J., 2017. What explains the difference in leverage between banks and nonbanks? J. Financ. Quant. Anal. 52, 2677–2702.
Berger, A.N., Guedhami, O., Kim, H.H., Li, X., 2020. Economic policy uncertainty and bank liquidity hoarding. J. Financ. Intermed. 49, 100893.
Berger, A.N., Cai, J., Roman, R.A., Sedunov, J., 2021a. Supervisory enforcement actions against banks and systemic risk. J. Bank. Financ. 106222.
Berger, A.N., Li, X., Morris, C.S., Roman, R.A., 2021b. The effects of cultural values on bank failures around the world. J. Financ. Quant. Anal. 56, 945–993.
Bordo, M.D., Duca, J.V., Koch, C., 2016. Economic policy uncertainty and the credit channel: aggregate and bank level U.S. evidence over several decades. J. Financ.
Stab. 26, 90–106.
Borghesi, R., Chang, K., 2020. Economic policy uncertainty and firm value: the mediating role of intangible assets and R&D. Appl. Econ. Lett. 27, 1087–1090.
Bostandzic, D., Weiß, G.N.F., 2018. Why do some banks contribute more to global systemic risk? J. Financ. Intermed. 35, 17–40.
Boubakri, N., Mirzaei, A., Samet, A., 2017. National culture and bank performance: evidence from the recent financial crisis. J. Financ. Stab. 29, 36–56.
Boyd, J.H., De Nicoló, G., 2005. The theory of bank risk taking and competition revisited. J. Financ. 60, 1329–1343.
Brownlees, C., Engle, R.F., 2017. SRISK: a conditional capital shortfall measure of systemic risk. Rev. Financ. Stud. 30, 48–79.
Brunnermeier, M., Rother, S., Schnabel, I., 2020. Asset price bubbles and systemic risk. Rev. Financ. Stud. 33, 4272–4317.
Chen, P.-F., Lee, C.-C., Zeng, J.-H., 2019. Economic policy uncertainty and firm investment: evidence from the U.S. market. Appl. Econ. 51, 3423–3435.
Chen, L., Li, H., Liu, F.H., Zhou, Y., 2021. Bank regulation and systemic risk: cross country evidence. Rev. Quant. Finan. Acc. 57, 353–387.
Chi, Q., Li, W., 2017. Economic policy uncertainty, credit risks and banks’ lending decisions: evidence from Chinese commercial banks. China J. Account. Res. 10,
33–50.
Chui, A.C.W., Titman, S., Wei, K.C.J., 2010. Individualism and momentum around the world. J. Financ. 65, 361–392.
Cui, X., Wang, C., Liao, J., Fang, Z., Cheng, F., 2021. Economic policy uncertainty exposure and corporate innovation investment: evidence from China. Pac.-Basin
Finance J. 67, 101533.
Danisman, G.O., Ersan, O., Demir, E., 2020. Economic policy uncertainty and bank credit growth: evidence from European banks. J. Multinatl. Financ. Manag. 57-58,
100653.
Diebold, F.X., Yilmaz, K., 2012. Better to give than to receive: predictive directional measurement of volatility spillovers. Int. J. Forecast. 28, 57–66.
Duan, Y., El Ghoul, S., Guedhami, O., Li, H., Li, X., 2021. Bank systemic risk around COVID-19: a cross-country analysis. J. Bank. Financ. 133, 106299.
Fratzscher, M., König, P.J., Lambert, C., 2016. Credit provision and banking stability after the Great Financial Crisis: the role of bank regulation and the quality of
governance. J. Int. Money Financ. 66, 113–135.
Goetz, M.R., 2018. Competition and bank stability. J. Financ. Intermed. 35, 57–69.
Gulen, H., Ion, M., 2016. Policy uncertainty and corporate investment. Rev. Financ. Stud. 29, 523–564.
Hassett, K.A., Metcalf, G.E., 1999. Investment with uncertain tax policy: does random tax policy discourage investment. Econ. J. 109, 372–393.
He, Z., Niu, J., 2018. The effect of economic policy uncertainty on bank valuations. Appl. Econ. Lett. 25, 345–347.
He, F., Ma, Y., Zhang, X., 2020. How does economic policy uncertainty affect corporate innovation? – Evidence from China listed companies. Int. Rev. Econ. Financ.
67, 225–239.
Hermes, N., Lensink, R., 2001. Capital flight and the uncertainty of government policies. Econ. Lett. 71, 377–381.
Hofstede, G., 2001. Culture’s Consequences: Comparing Values, Behaviors, Institutions and Organizations Across Nations. Sage Publications, Thousand Oaks, CA.
Hu, S., Gong, D., 2019. Economic policy uncertainty, prudential regulation and bank lending. Financ. Res. Lett. 29, 373–378.
Iqbal, U., Gan, C., Nadeem, M., 2020. Economic policy uncertainty and firm performance. Appl. Econ. Lett. 27, 765–770.
Jory, S.R., Khieu, H.D., Ngo, T.N., Phan, H.V., 2020. The influence of economic policy uncertainty on corporate trade credit and firm value. J. Corp. Finan. 64,
101671.
Julio, B., Yook, Y., 2012. Political uncertainty and corporate investment cycles. J. Financ. 67, 45–83.
Justesen, M.K., 2008. The effect of economic freedom on growth revisited: new evidence on causality from a panel of countries 1970–1999. Eur. J. Polit. Econ. 24,
642–660.
Kanagaretnam, K., Lim, C.Y., Lobo, G.J., 2011. Effects of national culture on earnings quality of banks. J. Int. Bus. Stud. 42, 853–874.
Kanagaretnam, K., Lim, C.Y., Lobo, G.J., 2014. Influence of national culture on accounting conservatism and risk-taking in the banking industry. Account. Rev. 89,
1115–1149.
Kanagaretnam, K., Lobo, G.J., Wang, C., Whalen, D.J., 2019. Cross-country evidence on the relationship between societal trust and risk-taking by banks. J. Financ.
Quant. Anal. 54, 275–301.
Kang, W., Lee, K., Ratti, R.A., 2014. Economic policy uncertainty and firm-level investment. J. Macroecon. 39, 42–53.
Kelly, B., Pástor, Ľ., Veronesi, P., 2016. The price of political uncertainty: theory and evidence from the option market. J. Financ. 71, 2417–2480.
Khan, A., Hassan, M.K., Maroney, N., Boujlil, R., Ozkan, B., 2020. Efficiency, diversification, and performance of US banks. Int. Rev. Econ. Financ. 67, 101–117.
Klößner, S., Sekkel, R., 2014. International spillovers of policy uncertainty. Econ. Lett. 124, 508–512.
Laeven, L., Ratnovski, L., Tong, H., 2016. Bank size, capital, and systemic risk: some international evidence. J. Bank. Financ. 69, S25–S34.
Lepetit, L., Strobel, F., 2015. Bank insolvency risk and Z-score measures: a refinement. Financ. Res. Lett. 13, 214–224.
Nguyen, T.C., 2021. Economic policy uncertainty and bank stability: does bank regulation and supervision matter in major European economies? J. Int. Financ. Mark.
Inst. Money 74, 101387.
Phan, D.H.B., Iyke, B.N., Sharma, S.S., Affandi, Y., 2021. Economic policy uncertainty and financial stability–is there a relation? Econ. Model. 94, 1018–1029.
20
Saeed, M., Izzeldin, M., Hassan, M.K., Pappas, V., 2020. The inter-temporal relationship between risk, capital and efficiency: the case of Islamic and conventional
banks. Pac.-Basin Finance J. 62, 101328.
Shabir, M., Jiang, P., Bakhsh, S., Zhao, Z., 2021. Economic policy uncertainty and bank stability: threshold effect of institutional quality and competition. Pac.-Basin
Finance J. 68, 101610.
Shleifer, A., Vishny, R.W., 2010. Unstable banking. J. Financ. Econ. 97, 306–318.
Tabash, M.I., Farooq, U., Ashfaq, K., Tiwari, A.K., 2022. Economic policy uncertainty and financing structure: a new panel data evidence from selected Asian
economies. Res. Int. Bus. Financ. 60, 101574.
Tang, W., Ding, S., Chen, H., 2021. Economic uncertainty and its spillover networks: evidence from the Asia-Pacific countries. Pac.-Basin Finance J. 67, 101539.
Tran, D.V., Hassan, M.K., AlTalafha, S.H., Turunen-Red, A., 2021. Policy uncertainty, the use of derivatives: evidence from U.S. bank holding companies (BHCs). Res.
Int. Bus. Financ. 58, 101447.
Varotto, S., Zhao, L., 2018. Systemic risk and bank size. J. Int. Money Financ. 82, 45–70.
Wang, Y., Chen, C.R., Huang, Y.S., 2014. Economic policy uncertainty and corporate investment: evidence from China. Pac.-Basin Finance J. 26, 227–243.
Wang, C.-W., Lee, C.-C., Chen, M.-C., 2022. The effects of economic policy uncertainty and country governance on banks’ liquidity creation: international evidence.
Pac.-Basin Finance J. 71, 101708.
Yang, Z., Gan, C., Li, Z., 2019. Role of bank regulation on bank performance: evidence from Asia-Pacific commercial banks. J. Risk Financ. Manag. 12, 131.
Youssef, M., Mokni, K., Ajmi, A.N., 2021. Dynamic connectedness between stock markets in the presence of the COVID-19 pandemic: does economic policy
uncertainty matter? Financ. Innov. 7, 13.
21

1 s2.0 S0927538X22001238 Main

Uploaded by

Copyright:

Available Formats

You might also like

1 s2.0 S0927538X22001238 Main

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1 s2.0 S0927538X22001238 Main

Uploaded by

Copyright:

Available Formats

Pacific-Basin Finance Journal 75 (2022) 101828

Contents lists available at ScienceDirect

Pacific-Basin Finance Journal

Economic policy uncertainty and bank systemic risk: A

2. Literature review and hypothesis development

and Li, 2017; Danisman et al., 2020).

2.1. Individualism, EPU and bank systemic risk

2.2. Power distance, EPU and bank systemic risk

2.3. Masculinity, EPU and bank systemic risk

2.4. Uncertainty avoidance, EPU and bank systemic risk

2.5. Long-termism, EPU and bank systemic risk

3. Data and methodology

3.1. Systemic risk

VaRi,j,t (q) = − Φ− 1 (q)σj,t × 100, (4)

ΔCoVaRi,j,t (q) = − Φ− 1 (q)ρi,j,t σ j,t × 100. (5)

Australia 7 1176 1.994 4.573

3.2. Economic policy uncertainty (EPU) data

3.3. Other controls

3.4. Descriptive statistics

ΔCoVaR 114,874 1.097 0.953 0.369 0.927 1.524

Fig. 1. ΔCoVaR and EPU.

3.5. Econometric framework

Fig. 2. ΔCoVaR and EPU time varying diagram.

Dependent Variable: ΔCoVaR

EPU 0.543*** 0.330*** 0.361***

4. Results and discussion

4.1. EPU and systemic risk

Market value of common equity

Leverage Risk ΔCoVaR Asset Risk ΔCoVaR

EPU 0.012*** 0.397***

4.3. Moderating role of formal and informal institutions

Dependent Variable: ΔCoVaR

EPU 0.353*** 0.442*** 0.427*** 0.459***

Dependent Variable: ΔCoVaR

EPU 0.366*** 0.384*** 0.362*** 0.364*** 0.355***

4.4. Heterogeneity test

4.4.1. The role of bank size

4.4.2. Developed and developing countries

(1) (2) (3) (4) (5) (6) (7) (8)

Dependent Variable: ΔCoVaR

EPU 0.492*** 0.263*** 0.404*** 0.160 0.357*** 0.227** 1.423*** 0.354***

4.4.3. High or low economic freedom

4.4.4. Crisis and noncrisis periods

4.5. Further discussion

4.6. Robustness tests

Pacific-Basin Finance Journal 75 (2022) 101828

Brownlees and Engle (2017), we construct SRISK as follows:

Appendix A. Variable definitions

Variable Definition Source

Appendix B. Robustness test

(1) (2) (3) (4) (5) (6)

MES VaR SRISK

EPU 0.831*** 0.434*** 1.000*** 0.560*** 0.017*** 0.003***

MES VaR SRISK

ROA − 0.169*** − 0.355*** − 0.002***

(1) (2) (3)

Dependent Variable: ΔCoVaR

EPU 0.376*** 0.311*** 0.295***

EPU 0.543* 0.330* 0.361***

EPU 0.012* 0.397*

EPU 0.353* 0.442* 0.427* 0.459*

EPU 0.366* 0.384* 0.362* 0.364* 0.355***

EPU 0.492* 0.263* 0.404* 0.160 0.357* 0.227 1.423* 0.354***

EPU 0.831* 0.434* 1.000* 0.560* 0.017* 0.003*

ROA − 0.169* − 0.355* − 0.002***

EPU 0.376* 0.311* 0.295***