Uncertainty Effects on the Financial Sector: International Evidence

We examine the effects of uncertainty on the financial sector in a multidimensional context. In our investigation, 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 and banks’ appetite for 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. ∗Corresponding author; Department of Economics, Boston College, Chestnut Hill, MA 02467, USA. Tel: +1 617 834 4615; E-mail: [email protected]. We acknowledge the comments of participants in the Wolpertinger Conference, Santander; World Finance Conference, Sardinia; and Financial Engineering and Banking Society International Meeting, Glasgow. All authors have no declarations of interest.