article · The Journal of Risk Finance
This research assesses how geopolitical risks influence banking stability, profitability, and solvency in emerging economies across the Middle East and Africa. Using a two-step Generalized Method of Moments econometric model, data from 125 banks across 13 countries were examined over the period from 2003 to 2019. The results indicate that Middle Eastern banks show a significant sensitivity to geopolitical risks, with banks that anticipate or adapt to these conditions experiencing a positive effect on their performance. In contrast, the analysis found that the effect of geopolitical risk on the profitability of African banks is inconclusive and statistically insignificant. The research demonstrates that the relationship between geopolitical tensions and financial sector outcomes varies considerably depending on the regional context, requiring distinct responses from financial institutions operating in different emerging markets.
Bank stability and profitability are essential for broader economic growth and for maintaining the public's confidence in financial institutions. Understanding how international and regional conflicts impact banking performance helps financial institutions and regulators design tailored risk management strategies suited to the unique geopolitical realities of specific emerging markets.
The findings can inform financial risk management frameworks and policy designs for banking institutions and regulators operating in emerging markets, particularly in the Middle East. As an econometric study based on historical data spanning 2003 to 2019, the insights represent early-stage empirical evidence that strategy teams and risk analysts can integrate into existing institutional risk modelling.
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Purpose This study delves into the critical issue of banks' stability and profitability, which are crucial elements for fostering economic growth and preserving depositor confidence. Specifically, we scrutinize the impact of geopolitical risks on the profitability and solvency of banks operating in emerging economies across the Middle East and Africa. Design/methodology/approach Employing a two-step Generalized Method of Moments (GMM) approach, we analyze a comprehensive dataset comprising 125 banks spanning 13 emerging economies in the Middle East and Africa, covering the period from 2003 to 2019. Findings Our study reveals a significant sensitivity of Middle Eastern banks to geopolitical risks, wherein effective anticipation or adaptation to these risks positively influences bank performance. Conversely, the impact of geopolitical risk on African banking profitability appears inconclusive and statistically insignificant. These nuanced findings underscore the complex interplay between geopolitical dynamics and financial performance in diverse regional contexts, with implications for policymakers and industry stakeholders. Practical implications Our findings underscore the need for nuanced policy responses and risk management strategies tailored to the unique challenges posed by geopolitical dynamics in emerging markets. Furthermore, they highlight the importance of continued research efforts to deepen our understanding of these complex interactions and inform more effective decision-making in the financial sector. Originality/value Amidst growing recognition of the importance of geopolitical risks in financial markets, empirical studies exploring their precise impact on bank performance remain scarce. This study fills this gap by offering a pioneering investigation into the influence of geopolitical risks on bank profitability and solvency, using advanced econometric techniques and a substantial, diverse sample of banks in emerging economies across the Middle East and Africa.
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DOI: 10.1108/jrf-10-2023-0243
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