Blessing in Disguise: Policy Uncertainty and Bank Systemic Risk

Does higher policy uncertainty lead to higher financial risk? This study provides evidence of the opposite. Based on a sample of 16 listed banks from 2011 to 2020 in China, we find that economic policy uncertainty has a significant negative impact on bank systemic risk and that the effect is more pronounced for small and unprofitable banks. Further analysis shows that the decline in bank systemic risk is due to the lower asset and liability structural similarity between banks. This study uncovers a volunteer mechanism of preventing bank systemic risk under policy uncertainty.