Bank Stability Under Global Risk Uncertainty: The Interplay of Internal Characteristics and External Regulatory Environment

This study examines the impact of global political and climate uncertainty on bank stability, utilizing panel data from 604 banks across 40 countries during the period 2011–2022. Through fixed effects and difference GMM methodologies, the analysis reveals that both geopolitical and climate risks adversely affect bank stability. Notably, tightening governance creates a ‘regulatory compliance paradox’ which leads to lower climate readiness and bank stability. We also identified that capital buffers matter in enhancing bank readiness to face geopolitical and climate uncertainty. However, efficiency plays a dual role. In times of geopolitical risk, it is necessary, but we also can’t achieve optimal climate readiness without incurring high costs. Outcomes differ across regions, sectors, and bank characteristics, underscoring the necessity for balanced regulatory frameworks, particularly within Asia, Africa, and Australia. It is recommended that policymakers collaborate closely with financial institutions to align environmental regulations effectively.