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The Impact of Uncertainty on Financial Institutions

Christopher Baum (), Mustafa Caglayan () and Bing Xu ()

No 939, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: We examine the effects of uncertainty on several facets of the financial sector. Using a large country-level unbalanced panel dataset, we show that inflation uncertainty reduces availability of private sector credit; harms banks’ efficiency and operational performance, evidenced by lower returns and increased reliance on non-interest income activities; and distorts sectoral stability, as liquidity, banks’ appetite for risk and credit risk increases. Our findings, based on the full dataset and country splits, are economically meaningful and provide evidence that uncertainty harms the overall health of the financial sector.

Keywords: financial depth; profitability; non-interest income; stability; uncertainty (search for similar items in EconPapers)
JEL-codes: C22 C23 D81 E51 (search for similar items in EconPapers)
Date: 2017-12-09, Revised 2018-09-20
New Economics Papers: this item is included in nep-ifn and nep-mac
Note: previously circulated as "Uncertainty Effects on the Financial Sector: International Evidence"
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Forthcoming, International Journal of Finance and Economics

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