Economic policy uncertainty, digital transformation, and bank systemic risk

Using unbalanced panel data from 42 Chinese listed banks between 2010 and 2023, this study empirically investigates the effect of digital transformation on bank systemic risk under economic policy uncertainty. The results show that when the level of digital transformation is low, it amplifies the positive relationship between economic policy uncertainty and systemic risk. However, as digital transformation reaches a higher level, it mitigates the adverse impacts of this uncertainty on bank stability. This effect is more evident among national banks, banks with stronger innovation capacity, and those with higher liquidity creation efficiency. Mechanism analysis suggests that digital transformation primarily reduces systemic risk through improvements in banks’ operational efficiency and profitability, as well as by reducing interbank correlation risk. Based on these findings, the study recommends that banks accelerate digital transformation processes. It also advises regulators to implement differentiated strategies according to bank characteristics and support the integration of digital technologies in bank management to strengthen resilience against economic policy uncertainty. • This study empirically reveals a nonlinear moderating effect of digital transformation on bank systemic risk under economic policy uncertainty. • Initially, low digital transformation amplifies systemic risk, while advanced digitalization significantly mitigates the adverse impacts of policy uncertainty on bank stability. • This beneficial effect is more pronounced in national banks, those with stronger innovation capacity, and higher liquidity creation efficiency. • Digital transformation reduces systemic risk primarily by enhancing operational efficiency, improving profitability, and decreasing interbank correlation.