US–China Tensions and Financial Stability: An Exploration of Emerging Countries Through the Lens of Institutional Governance

ABSTRACT

The growing intricacy of US–China tensions (UCTs) has garnered significant interest among scholars globally, prompting investigations into its effects on multiple dimensions of the global economy. In this quest, the present study attempts to explore the impact of UCT on the banking stability of the South Asian countries. In addition, the study also explores the moderating role of quality of governance on the aforementioned relationship. To empirically test the aforementioned objectives, the study employs the system generalised method of moments (Sys‐GMM) on the newly constructed UCT index and alternative proxies for measuring banking stability, that is, Z ‐scores and non‐performing loans (NPLs), of South Asian countries covering the period from 2001 to 2023. In addition, the study also employed the SELPDM model as a robustness estimate. The Sys‐GMM estimate indicates that the UCT impedes banking stability by reducing Z ‐scores and increasing NPLs in South Asian countries. The results also suggest that both the composite quality of governance index and its individual dimensions positively impact banking sector stability by strengthening Z ‐scores and lowering NPLs in South Asian countries. Finally, the moderating variable indicates that when quality of governance interacts with the UCT index, it assists in moderating the negative impact of the UCT index on the banking sector's stability. The moderating variable assists in reinforcing the robustness of a strong institutional framework in making the banking sector more resilient against the UCT index. The study is an original work that offers significant practical implications to comprehend the role of quality of governance and the adverse implications of UCTs on the banking stability within emerging economies.