On the uncertainty-global bank linkage nexus: The moderation of crises, financial regulations, and institutional quality

This paper investigates the effects of uncertainty on international bank linkages based on international data from 1990 to 2013. We further provide insights into this relationship by testing the moderating effects of crises, financial regulations, and institutional quality. The amount of bank pairs that connect via international syndicated lending from source to target country is used to measure the global bank linkages whereas the world uncertainty index reflects a country's uncertainty. We control the unobserved factors by using a full set of fixed effects, including year, source, target-country, and country-pair fixed effects. Moreover, we incorporate the source country-year fixed effect that reflects any international and country-level shocks affecting bank loan supply from a common source country to disentangle the effect of uncertainty shocks in the host country. The empirical results show that the uncertainty in target countries dampens the bank linkages. The effect of uncertainty becomes pronounced when the target countries have crises, stricter financial regulations, or weaker institutions. Our main results are robust when using alternative measures of uncertainty and when controlling for endogeneity problems.