Do Economic and Geopolitical Risks Matter for Banks’ Lending Decisions, Credit Risk, Performance, and Stability in South Africa?

Abstract

Purpose: The objective of this study was to investigate the effect of economic and geopolitical risks on the lending decisions, credit risk, performance, and stability of banks in South Africa. Design/Methodology/Approach: To achieve this objective, ten banks were assessed for the period ranging from 2013 to 2022, and panel regressions were estimated with cross-sectional fixed effects. Findings: The results show that economic policy uncertainty (EPU) decreases credit risk and increases stability in the South African banking sector whilst geopolitical risk (GPR) increases credit risk and decreases stability. Further, it was found that these effects are more pronounced in banks with smaller market capitalizations and higher equity capitalizations. Moreover, global GPR has a destabilizing effect on South African banks. Remarkably, both EPU and GPR do not significantly influence lending decisions and performance by banks in South Africa. Practical Implications: This research enables a greater understanding of the determinants of banks’ lending decisions, credit risk, performance, and stability which is essential for devising governance policies and regulations to reduce fragilities in the banking system. Originality/Value: Given the scarcity of banking sector research in emerging markets, this study contributes to the existing literature by investigating the role of EPU and GPR on banking sector dynamics which remains understudied in South Africa.

Keywords

• bank lending
• bank stability
• credit risk
• economic policy uncertainty
• geopolitical risk