The impact of uncertainty on financial institutions

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.