The moderating role of country-specific uncertainty in the cross-border banking–financial stability relationship

Type of the article: Research ArticleAbstractThe purpose of this study is to examine whether country-specific uncertainty modifies the relationship between cross-border banking exposure and financial stability. The analysis uses an annual panel covering 53 countries over 2005–2024, with 788 country-year observations in the baseline estimation sample. Financial stability is measured by the ratio of bank non-performing loans to total gross loans, cross-border banking exposure by BIS consolidated cross-border claims relative to GDP, and uncertainty by the country-specific World Uncertainty Index. The empirical strategy employs country and year fixed effects with standard errors clustered at the country level and includes an interaction between cross-border banking exposure and uncertainty. Formal triple-interaction tests are used to assess heterogeneity across exchange-rate regimes, levels of economic development, and financial depth. Robustness checks include lagged explanatory variables, placebo leads, country-specific linear trends, bias-corrected dynamic estimation, alternative transformations of cross-border exposure, and sample checks. The results show that higher uncertainty makes the relationship between cross-border banking exposure and non-performing loans more positive, indicating a less favorable association with financial stability as uncertainty rises. This moderating relationship is significantly stronger under pegged exchange-rate regimes, in developing economies, and in countries with greater financial depth. The main finding remains robust across the alternative specifications and sample checks. However, because the study is based on observational cross-country panel data, the results should be interpreted as conditional associations rather than definitive causal effects.AcknowledgmentsThe author gratefully acknowledges the financial support of the Banking Academy of Vietnam.