The effect of geopolitical risk on bankruptcy risk of commercial banks around the world

Abstract

This article examines the impact of geopolitical risk on the bankruptcy risk of commercial banks worldwide based on 13491 observations from 1,223 banks during the period 2002- 2021. The study employs OLS regression method and addresses the issue of changing variance by clustering data according to countries, regions, and robust standard errors. The findings suggest that when factors increasing geopolitical risk occur, they negatively affect stability, increasing the bankruptcy risk of commercial banks. The article not only employs Caldara's GPR but also utilizes other political metrics such as the increase in terrorist incidents and the number of terrorist attacks in each country. Additionally, the study also finds that larger asset size and higher proportions of non-interest income sources contribute to bank stability, while financial leverage has an opposite effect. To minimize the bankruptcy risk of commercial banks, governments, besides stabilizing macroeconomic conditions and enhancing domestic institutional quality, should expand peaceful cooperation relationships with multiple countries to stabilize geopolitical situations. Commercial banks need to restructure their capital base to a safer level, limiting illiquidity. Depositors and investors should consider the banks they deposit their money in or decide to invest with, along with diversifying portfolios across different countries to minimize the impact of geopolitical risk.