Economic Policy Uncertainty, Financial Soundness and Financial Stability in Ghana

ABSTRACT The increasing interconnectedness of the global economy has highlighted the importance of global economic policy uncertainty, which has been shown to affect the stability of the banking sector worldwide. Despite extensive research on the nexus between economic policy uncertainty and bank stability, there remains limited understanding of how policy‐variable‐based uncertainty affects Ghana's banking industry. This study examines how policy‐based economic uncertainty affects the financial soundness and stability of Ghana's banking industry, using monthly data from February 2008 to April 2023 for 13 listed banks. It develops a new economic uncertainty index and a financial soundness index for Ghana. Using the Heteroskedasticity Corrected Model, Ordinary Least Squares, Generalised Linear Model, and Quantile Regression models, the analysis shows that both policy‐based and composite uncertainty indices have a significant negative effect on banking stability. The paper recommends that policymakers enhance fiscal and monetary consistency and that banks integrate these measures into risk management to strengthen financial resilience.