Economic Policy Uncertainty and Banking Stability in WAEMU Countries: The Role of Banking Specificities

Abstract

This paper analyses the effect of economic policy uncertainty on banking stability, taking into account bank size, capital and liquidity. The study covers WAEMU countries with the exception of Guinea-Bissau, for which data were not available. The data used come mainly from GFDD (2024) and WDI (2024). Using Bruno's (2005) LSDVC estimator, the main results show that economic policy uncertainty has a negative effect on bank stability. However, when accounting for interactions between uncertainty and bank characteristics such as size, capital, and liquidity, these factors appear to mitigate this negative effect. Thus, larger, better capitalized banks with adequate liquidity are better prepared to withstand periods of economic uncertainty. These findings highlight the importance of enhanced supervision of banks to ensure their compliance with capital and liquidity standards.