Narrative Disclosure Tone and Bank Risk: The Role of Economic Policy Uncertainty

ABSTRACT This study examines the impact of narrative disclosure tone (NDT) on bank riskiness, particularly in the context of heightened economic policy uncertainty (EPU). Utilizing data from 114 banks across 2052 bank‐year observations between 2005 and 2022, our findings reveal a significant positive relationship between NDT and various measures of bank risk, including credit, liquidity, operational, and market risks. The results demonstrate that a negative tone in narrative disclosures heightens perceived and actual risk, with this effect being further amplified during periods of high EPU. Our study highlights the strategic importance of narrative disclosures in managing stakeholder perceptions and highlights the need for banks to carefully consider their communication strategies in volatile economic environments. These findings offer practical insights for banking institutions, regulators, and investors in understanding the complex dynamics between narrative tone, economic uncertainty, and financial risk.