Global financial fragmentation under raised geopolitical risk

Abdullah Alsadan (), Hassan Alalmaee (), Chokri Zehri () and Wissem Ajili Ben Youssef ()
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Abdullah Alsadan: College of Business Administration in Hawtat Bani Tamim, Prince Sattam Bin Abdulaziz University
Hassan Alalmaee: College of Business Administration in Hawtat Bani Tamim, Prince Sattam Bin Abdulaziz University
Chokri Zehri: College of Business Administration in Hawtat Bani Tamim, Prince Sattam Bin Abdulaziz University
Wissem Ajili Ben Youssef: Department of Law, Finance and Control, EM Normandie Business School, Métis Lab

International Economics and Economic Policy, 2025, vol. 22, issue 3, No 9, 32 pages

Abstract: Abstract Recent geopolitical tensions have intensified, disrupting global financial interconnectedness and increasing market fragmentation. This study explores the adverse effects of global financial fragmentation, driven by geopolitical risk, on banking systems and reducing international risk diversification. We use an autoregressive distributed lag (ARDL) model on panel data from 55 emerging markets and advanced economies from 1990 to 2023. Our findings indicate that rising geopolitical tensions exacerbate global financial fragmentation and increase banking vulnerabilities in the short term. However, banks with higher capital ratios and stronger provisions for non-performing loans show greater resilience to these risks. Geopolitical risk and global financial fragmentation significantly reduce international risk diversification in the long term, more severely impacting EMEs than AEs. The policy implications of our findings emphasize the need to enhance financial resilience, improve risk management, and ensure stable FDI flows.

Keywords: Geopolitical risk; Financial fragmentation; Banking vulnerability; International risk; Cross-border banking flows (search for similar items in EconPapers)
JEL-codes: F36 F51 F62 G15 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10368-025-00671-x

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