Global economic policy uncertainty and credit risk in emerging economies: evidence from Bangladesh

Abstract The purpose of this study is to examine how global economic policy uncertainty (GEPU) affects short-run credit risk, measured by changes in non-performing loans (ΔNPLs), in a bank-dominated emerging economy, using Bangladesh as a case study. The empirical analysis employs annual data on commercial banks in Bangladesh from 2000 to 2021 and provides consistent and robust evidence that credit quality deteriorates as global economic policy uncertainty rises. The results indicate that a one-standard-deviation increase in lagged GEPU corresponds to a 1.21 percentage-point rise in the annual change in NPLs in the baseline model. Such shocks, therefore, have tangible implications for asset quality within a one-year policy horizon. The findings further 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 crisis periods, whereas stronger economic growth is associated with higher NPL ratios. Overall, the evidence underscores the importance of global policy uncertainty as a key determinant of credit quality in the domestic banking sector. The study concludes that integrating global uncertainty indicators and flow-based NPL metrics into early-warning and stress-testing frameworks can strengthen financial stability oversight.