When geopolitics ripples through banks: Global risk spillovers and Chinese bank fragility

Cross-border spillovers of global geopolitical risk (GPR) have intensified in recent years, yet their micro-level transmission to national banking systems remains largely unexplored. Using monthly GPR data from 44 economies, we construct a global GPR volatility spillover index via elastic net shrinkage VAR and generalized forecast error variance decompositions, and extract a directional inward-spillover index to China. Merging this index with quarterly panel data on up to approximately 2000 Chinese banks over 2010–2024, we estimate dynamic responses of bank risk along three dimensions (loan quality, leverage, and liquidity) using panel local projections with split-panel jackknife bias correction. Elevated inward spillovers are followed by a significant medium-term deterioration in loan quality, a “rise-then-fall” pattern in leverage, and a tightening of credit relative to deposits that persists for about a year and then fades. A balance-sheet decomposition traces these responses to deposit inflows, credit contraction, and subsequent consolidation; interaction-based channel tests yield only suggestive evidence. Banks with more aggressive loan portfolios show faster loan-quality deterioration and sharper credit tightening, and the adverse associations are weaker when macroprudential policy is tighter. These patterns support monitoring geopolitical risk spillovers within prudential frameworks, particularly in emerging market economies.