Exploring the Impact of Country Risk on Banking Sector Stability: Evidence from the MENA Region

This paper examines the impact of country risk on banking sector stability, employing the CAMELS framework, within 13 Middle Eastern and North African (MENA) countries for 1984–2024. The analysis exploits the impact of political, economic, and financial risk dimensions on 102 publicly listed banks using two-way random effects models and one-step dynamic panel data estimations. The findings reflected a significant inverted U-shaped nexus between country risk and the stability of the banking sector, addressing how high-country risk deteriorates banking resilience, whereas low country risk improves it. Political risk has the strongest impact with a similar nonlinear relationship. Conversely, economic and financial risks consistently have reverse linear effects. These findings signify the structural vulnerability of MENA banks to political, economic, and financial turmoil and address the urgent need for robust frames of risk management and fiscal discipline. This investigation extends sovereign risk theory, which explains the ability to maintain financial stability by integrating three core dimensions—political, economic, and financial risk—into a comprehensive empirical model that directly relates them to MENA banking stability and provides crucial insights for banking institutions, policymakers, and regulators in a highly volatile atmosphere.