Crisis Lessons Relearned: Uncertainty, Credit Tightening, and Default Dynamics from 2008 to COVID-19

Successive shocks from the Global Financial Crisis and COVID-19, renewed U.S.-China trade tensions under the Trump administration, and rapid advances in AI have contributed to geoeconomic uncertainty becoming a central factor in decision-making and planning within the financial sector. However, to date, systematic evidence linking economic policy uncertainty (EPU) to banking-sector risk and performance outcomes remains limited. This study synthesises evidence on how EPU affects bank credit risk by drawing from nine empirical studies spanning both advanced and emerging economies. The study identifies three consistent patterns across all the studies. First, a higher EPU is associated with higher NPL ratios. Second, bank characteristics (e.g., solvency, profitability, size/ownership) and market structure (concentration) mediate the effect of uncertainty on NPLs. Third, information transparency and digital transformation are crucial tools for mitigating the adverse effects of uncertainty on credit default risk. "The probability of a banking crisis (beginning) conditional on financial liberalisation is higher than the unconditional probability." Kaminsky and Reinhart, 1999.