Global Economic Policy Uncertainty and Credit Risk in Emerging Economies: Evidence from Bangladesh

The purpose of the present study is to examine how global economic policy uncertainty (GEPU) affects short-run credit risk, measured by non-performing loans (NPLs), in a bank-dominated emerging economy, using Bangladesh as the case study. The empirical analysis uses annual data on commercial banks in Bangladesh from 2000 to 2021 and finds consistent, robust evidence that credit quality decreases as global economic policy uncertainty increases. The results show that a one–standard-deviation increase in global economic policy uncertainty is associated with an approximately 9% rise in the average nonperforming loan ratio. Additional findings suggest that fiscal capacity and bank balance-sheet strength attenuate the transmission of uncertainty to credit risk by limiting short-run increases in non-performing loans during the crisis period, whereas stronger economic growth is associated with higher nonperforming loan ratios. Overall, the findings underscore the importance of global policy uncertainty as a key determinant of credit quality in the domestic banking sector. The study finally recommends that integrating global uncertainty indicators and flow-based NPL metrics into early-warning and stress-testing systems can strengthen oversight of financial stability.