| Abstract: |
We examine the effects of uncertainty on the financial sector in a
multidimensional context. In our investigation, using a large country-level
unbalanced panel dataset, we show that inflation uncertainty reduces
availability of private sector credit; harms banks' efficiency and operational
performance, evidenced by lower returns and increased reliance on non-interest
income activities; and distorts sectoral stability, as liquidity and banks'
appetite for risk increases. Our findings, based on the full dataset and
country splits, are economically meaningful and provide evidence that
uncertainty harms the overall health of the financial sector. |