The impact of uncertainty and institutional quality on commercial banks' risk in Asia

Purpose — This study examines the impact of uncertainty, including global economic policy uncertainty (GEPU) and geopolitical risk (GPR), on the risk of Asian banks and investigates the moderating role of institutional quality.Methods — Using a bank-level sample of 463 banks from 24 Asian countries over 2010–2024, the study estimates empirical models using system GMM, complemented by multiple robustness checks to ensure result reliability. Findings — Our findings provide strong and consistent evidence that uncertainty, including global economic policy uncertainty (GEPU) and geopolitical risk (GPR), increases bank risk-taking. In addition, improving institutional quality through political stability weakens the positive effect of uncertainty on bank risk. Implications — Policymakers should implement protective mechanisms such as flexible monetary policy and strengthened capital standards, while enhancing institutional quality to safeguard banking system resilience. At the bank level, managers should establish contingency strategies, maintain adequate capital buffers, and adopt a "wait-and-see" approach to minimise decision errors under heightened uncertainty.Originality — This study contributes to the bank-level literature on uncertainty and bank risk-taking in Asia by using a broader and more recent sample that captures major uncertainty episodes not fully covered in earlier studies. It further extends prior research by employing multiple measures of uncertainty, including global economic policy uncertainty (GEPU) and geopolitical risk (GPR), and by examining how institutional quality conditions the effect of uncertainty on bank risk-taking.