Khóa luận tốt nghiệp Tài chính ngân hàng: The impact of geopolitical risk on bank stability

The urgency of topic In recent years, geopolitical events such as Brexit, the Russia-Ukraine conflict andChina-India tensions have occurred frequently generated new geopoliticaltensions,

VIETNAM NATIONALUNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

COURSE QH-2019 E

THE IMPACT OF GEOPOLITICAL RISK ON BANK STABILITY

Supervisor: MSc Cu Nguyen Ha Trang

Student: Nguyen Huyen Mai Student code: 19050691

Class: QH2019-E TCNH CLC2 Type of training: High Quality

Hanoi - 2023

VIETNAM NATIONALUNIVERSITY UNIVERSITY OF ECONOMICS AND BUSINESS

FACULTY OF FINANCE AND BANKING

COURSE QH-2019 E

THE IMPACT OF GEOPOLITICAL RISK ON BANK STABILITY

Supervisor: MSc Cu Nguyen Ha Trang

Student: Nguyen Huyen MaiStudent code: 19050691

Class: QH2019-E TCNH CLC2Type of training: High Quality

Hanoi - 2023

I would like to express my sincere thanks to the lecturers of the Faculty of Finance andBanking for their enthusiastic teaching and guidance over the past time Sincere thanks tothe Board of Directors of the University of Economics and Business - Vietnam National

University

I would like to express my heartfelt and most sincere gratitude to MSc Cu Nguyen HaTrang for guiding and supporting me throughout the process of making this thesis Hersuggestions are crucial directions to assist me in completing this thesis Although manyefforts have been made to do the researchin the most comprehensive way, the limitations ofknowledge and experience unavoidably lead to certain shortcomings To finish this study, Ihope to gain more valuable and constructive comments from lecturers

Hanoi, 10 May 2023

Author

Nguyen Huyen Mai

Hanoi, 10 May 2023

Author

Nguyen Huyen Mai

TABLE OF CONTENTSACKNOWLEDGE csssssssssssssssssssssssssssessssssssssssssssseessesssssssssesseeessssssssssseeeseesesssussssseessessssssssssseeseessssssseensensssssssssssss 1Moaf.) vv8 ,LÔỎ 2

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1.2 Research goals and tasks 0 ssessssssssssssssescsstessssesscssseesssssessesseesssnessesuteeessneeessnseeesssueeessaseesesneessenneesenneseen 71.3 Research Question o cssccsssssscsssssssssesssssessssseecssnesesssueesssssessesneeessneesssneeessneessusessesneeessnsesseenteeesnnessenseseey 71.4 Research data and Method qu ccsssssssssssssssssssssssssssssessssssseesssssseesssssssessssssseesssssessssssseeesssssens 71.5 Contribution Of reSearchuvssssssssssssessssssesssssssessssssseesssssseessssssseessssssesssssssssssssssseesssssseeesssssees 81.6 Structure Of the Stud y eesssssssscssssscssesscssescssneeecssseecssssesssnseesssuseceesneessssteeesnseeeesueeeesaneesesneesesneesennseeeen 8CHAPTER II: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 10

2.1 Overview Of geopolitical TÏSÌK, sec HH tri 10

2.4 Literature FOVICW wecsssssssssssssesssssessssessssseessssessssesssseessssstesssseesssseessssiesssuessssutessssiesssseessssiessanenss 21

2.4.1 GeopolitiCal RISKS eessssssessssessesseecsssecessseeessseeeessutecsssueeesssecesaueeseesseesesseeessneeeesuteesenaeessnseeessansess 21

2.4.2 Geopolitical Risks and bank stability -cccxxeexrkeettkriirtririirrrree 24

2.5 ResearCh BaP ecsesescssesescsseesesseesssstessssseeessssesesssseesssssesssnsessssnseesssnseeessneeeeessseessnseeseaseeesssnseceesnseeessseensenseessanssess 252.6 CONCIUSION CHAPteL seeessssesescssseccssesecestseecsssessesnecessneceesueeecsuseecsssseseesseesesseeesesueeeesnseeeesuteseenaeesssneesenseeeee 26

CHAPTER III: RESEARCH METHODOLOGY - 5+2 hư 27

3.1 Data and SaMple escssssssssessssseessssessssssessssssesssseessssseesssseessssteesssseeessssteesssseensssieesssseetssnieesssaeessnseenssnssess 27

3.2 Variables ssssssssssssssssssssssssssssesssssssssessesssseessssssseeesesssssieesssssseessssssueessessseessssssusesesssseessssssueessssssenses 27

3.2.1 Measuring geopolitical risk esssssessssessssseesesseesssssesscsseessssesesseesssseesssseeessneesesneeessaneeessaaee 27

3.2.2 Measuring bank stability -eccrkriirtrriirriiriiiiiiiiiiiiiriiiriirrrrriree 27

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3.3 Research MOdel sscsssssscscsessssecsssstecsssssessssseesssnesessseeessnecsssseesssueesssueecesaeecssneseesaseesssnseeeesueesesaneessnass 30 3.4 Methodology ssesscsssessssessssssesssneesssssseesssnseesssseeesssseesssnseessssseesssseeesssenssaseessaneesssseesssnseesssneenrsaseessanseeesenees 31 3.5 Conclusion CHAPteL esescsessecssstssscssteesssseeseesseesessseesssseeeessseesssseeesssseesessseesssnseesssseeessseesessaesseaneesesssneesnaees 31 CHAPTER IV RESULTS AND DISCUSSIONS che 32 4.1 DeSCriptive SEaEÏSỂHCS c« HH HH HH HH HH HH1 111111.11111111enrtkr 32 4.2 Correlation Matrix eesssssessssssssssesssssessssseessssseessssssesssneessnseenssneessssseesssnseesssseeessnsesessnseesessseessssneessaneensans 33 4.3 Empirical results 76 7 33

A.A Testing the 0) 756 36

4.5 Conclusion ChapT s-ccccssccrrrrerrrrrrrrrrrrrrtrtrkrtrrrkrrrrrrrrrrrrrrrrrrkrrrrrrrrrrrrrrrirrerrrrrerrrrrrerrrrree 38 ;Ÿ/.\d02):01/0059))190913(0))0077554 39

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5.2 PrOpOSE 10060077 39

5.2.1 Recommendations for the regulatory agencies of the nations - 39

5.2.2 Recommendations for Danks ce+-5cceescerxxesrrrkrttrkirrtrrrrrrriiirrirrriirrrrree 40 5.3 0i Tố 42

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LIST OF TABLES, FIGURES

Figure 2.1 Geopolitical risk fframe@WOT -ss+cscxverrrrrertrrrrrtrrrirtrrrirrrrrrrrrrrtrrrrirrerrrrrrrrrrrrerree 14

Table 3.1 Variables’ description and meaSUTÏTB ‹scesscrrrkiiirrrtrriiiiirririiiiriiiiirrririee 29

Table 4.1 Descriptive Statistics of the Variables -cxcc-krerttrriirrriiiiirriirriierke 32Table 4.2 Correlation MatrlX -c-s«<©+xxetEE k1 111 11kkrrie 33

Table 4.3 Results regression OLS, FEM, REM ce-cccrrkiierirriiirrriiiiiirrriiiiirriiee 33

Table 4.4 Testing the Models esssesssssssssssssesssssscsssessssssessssstesssneesssseessssneescesseesssneessssseessnsesesnutessenneessaneeess 36

CHAPTER I.INTRODUCTION

1.1 The urgency of topic

In recent years, geopolitical events such as Brexit, the Russia-Ukraine conflict andChina-India tensions have occurred frequently generated new geopoliticaltensions,exposedthe fragility of the international financial stability system, and pushed the world economyinto recession For instance, The Nord Stream gas pipeline explosion caused by the Russia-Ukraine war and the explosion of the Crimean bridge will further escalate the tension of theglobal political situation Russia's Ukrainian invasion in February 2022 caused more than1,000 companies to cut their operations in the 11th largest economy in the world Theadverse impact of geopolitical risks on financial markets is supported by a number ofempirical studies (Balcilar et al., 2018; Smales, 2021; Demir & Danisman, 2021) Notably, theexisting literature has shown that uncertainty regarding geopolitical tensions, militaryconflicts, political instability, and quality of policy formulation and execution decline bankcredit growth (Demir & Danisman, 2021) In order to fulfill the role of financialintermediaries and regulate monetary circulation, banks must meet the standards of

reliability and stability As a result, it is urgent for commercial banks to enhance the ability

to understand the influence of geopolitical events in order to reduce their adverse impacts,

build recovery capacity and maintain the stability of the financial system

It is easy to see an urgent requirement for global financial institutions to enhance theability to predict geopolitical risks, maintain the stability of the financial system and buildrecovery capacity It is really important and necessaryto consider whether geopoliticalriskscaused by instability related to geopolitical events, such as terrorist attacks affect thestability of the banking system Crockett (1997) believes that the explosion of crises in the

national system is related to stability at banks Borio (2003) argued that there were two

approaches to ensure stability, which is the model of macro and micro safety factors,including geopolitical risks

The understanding of the impact of geopolitical risks on bank stability has greattheoretical and practical significance for countries to accurately recognize the risks andpolicy mutual planning Application to stabilize the banking system to promote economicdevelopment Seeing that it is becoming increasingly important to study geopolitical risksfrom an economic perspective, the author has launched the study "The impact of geopoliticalrisk on bank stability"

1.2 Research goals and tasks

e Research goals

Analyze the impact of geopolitical risks on bank stability More precisely,this studyaims to investigate the level of related geopolitical risks and bank stability Since then theauthor proposes solutions to solve problems

e Research tasks

- Systematize theoretical issues of geopolitical risks, bank stability and relationship

between geopolitical risks and bank stability;

- Analyze the impact of geopolitical risks on bank stability;

- Based on the influence of geopolitical risks on bank stability to propose and propose

solutions for countries to see the exact risks and policy planning

1.3 Research question

With the objectives and research tasks presented, this study will answer 2 research

questions as follows:

Question 1: Do geopolitical risks affect bank stability?

Question 2: What is the level of impact on geopolitical risks on bank stability?

Question 3: What solutions to reduce the impact of geopolitical risks on bank stability?

1.4 Research data and method

e Methods of collecting and processing secondary data

Collect, systematize and analyze secondary information from available documents onthe contents related to the research topic, including:

- Theoretical basis of geopolitical risks, bank stability;

- Studies on the effects of geopolitical risks on the economy, especially profitability, risk, and stability of the bank and other relevant contents.

e Methods of collecting and processing primary data

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The geopolitical risk index is extracted from Caldara and Iacoviello (2018) Themacroeconomic indicators are collected from the data set of the World Bank (WB) and theInternational Monetary Fund (IMF) This thesis uses data from banks from 106 countriesfrom 2011-2021 The author uses the financial statements data of commercial banks in theworld from Refinitiv database Quantitative research using Stata 17 software.

1.5 Contribution of research

The author's research has contributed to existing studies Specifically:

Firstly, this study adds empirical evidence on the impact of geopoliticalrisks on bankstability, contributing to consolidating some more studies recently, for example, research on:Bank credit (Demir & Danisman, 2021), Bank's performance (Alsagr & Almazor, 2020), Cashholding policy (Kotcharin & Maneenop, 2020; Wang etal., 2021)

Secondly, through interactive variables, this research supplements experimentalevidence in more accurately reflecting the role of intermediate factors on the relationshipbetween geopolitical risks and stability Bank's finance Experimental evidence will behelpful for bank managers in developing appropriate policies and decisions, helping the bankovercome geographical and political instability to improve talent stability It is in the long

term.

1.6 Structure of the study

The study is divided into 5 chapters In chapter I, the thesis presents the reasons forresearch, research objectives, research questions, scope, research content, generalpresentation of research methods, thesis contributions on Scientific and practical side,presenting the dissertation's layout In chapter II, the study presents the theoretical basis ofgeopolitical risks, bank stability and relationship between them; Summarizing and arrangingthe previous research articles and then making the theory of the research and conclusionschapter II In chapter III, the study proposes the research model, the sign of the expectation

of the expectations of the variable used in research models, determining the researchmethod is applied in the thesis, describing research data and conclusions chapter III Inchapter IV, the study presents the research results of each tissue The image includesdescription statistics, correlation analysis, appropriate model selection tests, model defecttesting and regression results of each model, then discuss the research results and

conclusion chapter IV In chapter V, the study summarizes the achieved results, proposedsolutions.

CHAPTER II: THEORETICAL FRAMEWORK AND LITERATURE REVIEW

2.1 Overview of geopolitical risk

2.1.1 Definition

According to Caldara and Iacoviello (2018), geopolitical risk (GPR) is defined as therisk associated with terror threats, war threats, nuclear threats and military build-upsbetween states or countries that disrupt the usual, peaceful conduct of international affairs

On the other hand, according to Geopolitical Futures, geopolitical risks are defined as thepotential political, economic, military, and social risks that can emerge from a nation’s

involvement in international affairs Typically, they emerge whenever there is a major shift

in power, a conflict, or a crisis These risks can have far-reaching implications for both thecountry itselfand the global community at large There are many factors that can contribute

to geopolitical risks, such as a nation’s economic stability, its political relations with other

countries, and its military strength In recent years, globalization has also played a role inexacerbating these risks by increasing the interconnectedness of the world’s economies and

societies

2.1.2 The nature and content of geopolitical risk

Geopolitical risk is mainly the study of geographical aspects of political risk, that is, starting from the political system to observe the phenomenon of geopoliticalrisk, would still

return to the political risk level of analysis (APSA Annual Conference,2011) Therefore, the

nature of the geopolitical risk is the analysis of political risk but the international

environment and the interaction between geographic, and this relationship will change withthe geographical environment and acts on the interpretation of the nature of change varies

Such as geopolitical scholars Parker interpreted itas "members of the community structure

by analyzing the overall reality of space and the interaction of location" Agnew thought thatthere are two core concepts of geopolitics, namely, geography and politics, the former refers

to the geographical space of a table like the knowledge that "the world is what", the latter

means access to world power as a strategic thinking, that is, "what should we do it" It can be

seen that geopolitical risk concepts are often as results of the research, analysis about home country, eonomic, social, cultural and other subjective environment, and is different and for

their own national security awareness and foreign policy considerations, naturally easy toform the diverse and subjective qualities In other words, according to Geopolitical Futures,

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geopolitical risks are the potential political, economic, military, and social risks that canemerge from a nation’s involvement in international affairs.

Political Risk in Geopolitics

Political risks can arise from a number of issues, including disputes over territory,resources, or ideology They can also be the result of a country’s foreign policy decisions,which can unintentionally escalate tensions with other nations In recent years, a number of

geopolitical hotspots have emerged around the world These are regions where the risk of conflict is particularly high and where tensions are constantly simmering below the surface Some of the most notable hotspots include the South China Sea, the Middle East, and Eastern

Europe We’ve analyzed many of these issues and situations at length, and George himself

had made successful predictions, such as with the conflict between Ukraine and Russia, which George predicted nearly a decade before Putin sent troops across the border into Ukraine.

As youcan imagine, these geopolitical risks and their preceding events can havea greatinfluence on the private sector, that of the affected region, and the global market as a whole

Escalating conflicts and unrest can decimate both international and regional business ventures, leading to severe losses, including property destruction and even a complete shutdown of business operations.

Economics Risks In Geopolitics

The global economy is deeply interconnected, and events in one part of the world can

quickly ripple out to other regions As such, economic risks are an important consideration

in geopolitics Commodities prices can be volatile, and disruptions to the supply of key

resources can have a major impact on the global economy.

Trade is another important area to watch Protectionist measures by one country canlead to retaliation from others, and this can disrupt global trade flows The ongoing situation

or geopolitical risk (as of 2022) between the United States, Taiwan, and China, in part, may

be an example of this At the risk of oversimplifying what a long-standing and complexsituation is, the US and Taiwan have extensive trade agreements that are currently at risk

due to the long-standing conflict between China and Taiwan For many years, the US has worked to balance trade agreements with both entities, with varying degrees of success.

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Societal Risks In Geopolitics

There are a number of societal risks that can have an impact on geopolitics Theseinclude environmental risks, health risks, and safety risks Environmental risks includethings like climate change and natural disasters The concept of climate change is alreadyhaving an impact on global politics as countries grapple with the debate on how to respond

to possible threats or whether there might be potential opportunities in the future.

Health risks can also have an impact on geopolitics For instance, the outbreak of the Ebola virus in West Africa caused a number of countries to close their borders to the affected

countries in an effort to prevent the spread of the disease Fast forward, and we seea similarstory play out following the COVID outbreak, albeit on a much larger scale Global shutdowns,

mandates, and general unease caused major shifts.

National security risks include things like terrorism and civil unrest Terrorism can

have a major impact on geopolitics, as was seen after the 9/11 attacks in the United Stateswhen the U.S responded by going to war in Afghanistan and then Iraq The attacks led to a

significant increase in security measures around the world, as well as a heightened focus oncombating terrorism Likewise, civil unrest can also have an impact on geopolitics For

example, the Arab Spring uprisings that took place across the Middle East and North Africa

in 2010 and 2011 led to a number of changes in government, as well as an increase ininstability in the region

Legal And Regulatory Risks In Geopolitics

Legal and regulatory risk is the potential of loss that may result from changes in the

political or social environment, specifically that which evolves into changes in the laws of a

country Typically, these are laws that dictate the functioning of businesses, particularly

international businesses that have a holding within the region This type of geopolitical riskcan have an impact on individual businesses, entire industries, or even the global economy

as a whole An example of the last would be if a country moved towards more isolationist

policies that discourage foreign businesses from having a presence at all

Cyber Risks In Geopolitics

Without a doubt, the internet and digital communications have revolutionized the way

we interact with the world In many ways, this has been a boon that allows many people to

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live fuller lives At the same time, however, it has also created new opportunities forcriminals and other malicious entities to exploit.

One of the most significant geopolitical risks associated with the digital age iscybercrime This is a type of crime that involves using computers and other digitaltechnologies to commit crimes like fraud, identity theft, and espionage Criticalinfrastructure with strong digital-tech components, like electrical grids or pipeline pumpingstations, are also high-value targets Cybercrime is a growing problem for businesses andindividuals alike According to the Federal Bureau of Investigation (2022), cybercrime coststhe US economy in the realm of billions of US dollars each year And it’s not just bigbusinesses that are at risk-small businesses and even individuals can be victimized bycybercriminals

2.1.3 The reality and impact of geopolitical risk

Recently, the Ukraine war has brought energy security to the fore The world will needmore non-Russian fossil fuels The energy shock will likely boost decarbonization plans inEurope amid a race for clean energy leadership, as the continent responds to the InflationReduction Act that is driving investment in the U.S Though the Inflation Reduction Act’sprovisions are stoking tensions between the U.S and its allies, we believe the legislation willultimately be catalytic for increasing global investment in clean energy A divided U.S.Congress means the Biden administration will focus on implementation of the InflationReduction Act and regulatory actions Almost every industry, government, and society has

felt the weight of recent climate-related events From agriculture and transportation to

energy and healthcare, climate change has changed the way that businesses operate In 2022,heatwaves caused droughts that upended global supply chains, major flooding events costlives and livelihoods, and massive hurricanes disrupted economic activity In total, globallythere were 29 climate-related disasters with damages over a billion dollars But according

to a recent survey, only one-third of companies have a strong emphasis on the risks that

climate change poses for their business 2023 will be a test - there will be more

climate-related events, but businesses and governments must be prepared to respond

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Figure 2.1 Geopolitical risk framework

BlackRock Geopolitical Risk Indicator

15 U.S.announces | WHO declares

withdrawal from COVID-19 a global Iran deal pandemic Russia

-1

2018 2019 2020 2021 2022 2023

Source: BlackRock Investment Institute

The BlackRock is one of the world’s leading asset management firms and a premierprovider of investment management, risk management and advisory services toinstitutional, intermediary and retail clients worldwide, Geopolitical Risk Indicator aims tocapture overall market attention to geopolitical risks, as the figure 2.1 The indicator is asimple average of their top risks The indicator has declined from its 2022 highs and sits justabove its historical average Across their top risks, markets are most focused on U.S.-Chinastrategic competition BlackRock keeps our U.S.-China strategic competition risk rating at ahigh level amid heightened distrust and structural tensions in the relationship BlackRockkeeps Gulf tensions at high amid decreased prospects for a nuclear deal and an increasedrisk of military action in the region The market’s attention to Gulf tensions and the risk ofNorth Korea conflict is low This means these risks could have an outsizedimpact on markets

if they come to fruition

Geopolitical risk is the number one global corporate risk (Willis Towers Watson).Internationally it poses increasing management challenges, particularly at board level.Increased volatility in previously stable regions and the uncertainties that follow politicalchange are key geopolitical drivers of familiar and emerging risks Challenges are beingcreated by rising inequality and the risk of conflict, climate change politics and its impact, aswell as a decline in commitment to the international rule of law In our increasinglyglobalized and connected world, the impacta single event or shift in policy can have on anorganization can be magnified through a complex web of interrelated risks and themes Thephysical locations of premises, complex supply chains, geographically-mobile workforces

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and cyber connectivity have led to greater risk exposure emanating from cross-bordertransfer of goods and currency exchange, as well as employee and customer movement andincreased technical integration of businesses Global economies are confronted by a range ofgeopolitical challenges, including: the ongoing Russia-Ukraine War, China’s Covid crisis,unpredictable and increasingly protectionist trade policies, and ongoing pandemic-relatedeconomic distortions While the prioritization and relevance of each of these risks will bedifferent for each organization, according to Edelman Global Advisory (2022) sees the

following issues as the primary threats:

Global Economic Slowdown

Though economic experts’ consensus is mixed on whether global economies will experience a full recession, vulnerabilities, or abrupt decline, one thing is clear: 2023 will be

a difficult year for growth across most regions Global economies are confronted by a range

of geopolitical challenges, including: the ongoing Russia-Ukraine War, China’s Covid crisis,

climate-related events, unpredictable and increasingly protectionist trade policies, and ongoing pandemic-related economic distortions These pressures are felt across economies,

exemplified by inflation and subsequentinterest rate hikes, supply chain disruptions, energyprice hikes, and a hot labor market

While the economic slowdown will impact economies around the world, the US, China,and the EU will be disproportionately impacted, while emerging markets will see the best

chance for sustained growth Meanwhile, central banks continued to raise interest rates to

reduce demand for consumer goods and services in an effort to contain raging inflation Thehead of the International Monetary Fund (IMF) Kristalina Georgieva has warned that a third

of the global economy could be impacted by a recession in 2023 The head of the globalfinancial institution even described 2023 as a more difficult year than 2022 The eurozone,

at the heart of a serious energy crisis amid easing dependence on fossil fuels by Russiaand

the UK, is likely to witness a deeper recession than other countries “The severity of thecoming impacts on global GDP depends on the course of the conflict in Ukraine,” analysts atthe Institute of International Finance wrote ina study.US GDP is predicted to grow ata rate

of 1% in 2023 - down nearly half of the 2022 forecast - as companies prepare for aslowdown in consumer spending and delayed recovery from pandemic challenges In China,continued shocks from the end of its zero-Covid policies, lockdowns, a potential spike ininfections during the Lunar New Year season, and softening real estate market all point towhat is expected to be “the lowest growth rate in China since the 1970s,” outside of the 2020

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pandemic, according to the OECD The EU will also face rising energy, agricultural, andhousing rates as the Russia-Ukraine War continues to result in dramatic inflationarypressures and cost-of-living crises across the region.

Continued Supply Chain Challenges

The global supply chain that was once fraught with a post-pandemicconsumerdemandboom is now struggling under the weight of weakened demand and oversupply amid

economic challenges The maritime industry is seeing a dramatic drop in shipping container prices that has taken many by surprise - cargo container prices from China to the US West Coast fell 90% year-over-year This sharp decline, due to decreased demand, has also

impacted China’s manufacturing capabilities On top of this, some Chinese factories have shut

down weeks earlier than usual for Chinese Lunar New Year, which most companies have anticipated, but could still potentially cause intensified delays coming off of China’s relaxing

of its zero-Covid policy The lack of demand pressures is causing shortages up and down the

supply chain, affecting raw material availability, product delays, manufacturing capacity, and ship utilization.

Supply chain labor has also posed a challenge, as workers in key industries including

US railways, US West Coast ports, and British railways and postal services have staged or threatened strikes in recent months On top of episodic decreases from strikes, the American Trucking Association reports an 80,000-person shortage of truckers to transport goods, with similar shortages across US manufacturing As supply chain pressures increase, trade

partnerships are also shifting, and they will continue to reorient in 2023 to fill gaps that stillremain from the height of the pandemic

Energy crisis

The precarious energy situation, especially in Europe, will continue to plaguegovernments in 2023 Europe can only emerge from a full energy crisis this winter thanks to

mild weather more peaceful than usual and consumers cut energy use Lower heating

demand means that the region's stockpiles, which were already at 100% capacity last year,could remain fully stocked by the end of this winter That is likely to keep gas prices under

control next spring and help keep inflation down.

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However, the situation could still get tough before next winter In 2022, after spendinghundreds of billions of euros looking for alternatives to Russian energy and supportingconsumers, Europe may struggle to once again fill its stockpiles.

Competition for liquefied natural gas will intensify as China reopens and traditionalAsian buyers such as Japan and South Korea begin to look for more energy sources.According to Nolting, energy remains the main risk factor for the region, along with apossible gas shortage in the winter of 2023-2024

Technology War

Military and political tensions will continue to be one of the biggest risks to the

economy, just like in 2022 Mr Notting said: "Solutions to end Russia's conflict in Ukraineare not yet available clear This means that there is no solution to the knock-on effects of

this conflict on issues such as migration, global fossil fuel food and food supplies, and

geopolitical changes treatment can occur outside the region”

The battle for technological supremacy between the United States and China couldbecome more intense in 2023 In 2022, the United States banned the transfer of its modernsemiconductor technology to China “A trade conflict has now turned into an effort to create

long-term standards that apply in very important areas such as 5G telecommunications

networks, artificial intelligence and chips,” said Notting Success will expand the nation'spower base in the long run So neither side will want to give in easily.”

2.2 Overview of bank stability

2.2.1 Definition

The bank stability is achieved when these banks operate smoothly, not affected byunwanted agents in the present and in the future, firmly before economic shocks (VietnamTrade And Industry Review, 2021) Bank stability may be interrupted by the operation ofinternal financial elements and strong shocks that lead to holes Shocks that can come fromthe outside environment, macro factors, the role of creditors and debtors in banks, policies

or changes in institutions Any shock to the holes can lead to the collapse of banks andinterrupt the financial intermediaries and payment intermediaries of banks More seriously,

it can lead to the financial crisis and consequences for the economy

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2.2.2 The role of bank stability

Business stability includes many elements: stabilizing the operation of financialintermediaries, financial infrastructure (payment system and credit information system),financial market In particular, the operation stability of financial intermediaries is one of themost important factors (Vietnam Trade And Industry Review, 2021)

Commercial banks are one of the most important financial intermediaries of thefinancial system the bank plays a central role in the process of making money, paymentsystems, financialinvestments and distribution development of the economy The monetarybusiness of banks also suffered many direct and indirect impacts from the intrinsicdifficulties of the financial system, the economy as well as external impacts Therefore, bankstability is considered as important key content, mainly in financial stability

Bank instability significantly affects the process of transmitting the impact of monetarypolicy on the economy, real estate bubbles, high level of debt as well as the inefficiency of thebusiness sector has already been Negative effects on the central bank's efforts in curbinginflation and macro stability, especially when it is necessary to determine the time, extentand scale of monetary policy tools In the face of global economic and financial fluctuations,the success of monetary policy, fiscal policies and other macroeconomic policies depends onthe capabilities ofthe authorities in the construction The book is suitable and synchronous,

on the basis of mastering financialand macro transmission channels through the commercialbanking system Therefore, bank stability plays a bridge and close coordination between

fiscal, monetary, micro and macroeconomic policies, in order to perfect the macroeconomic

goals in each period

The stability helps banks to be able to withstand shocks and minimize the risk ofinterrupting business cycles to ensure the cash flow and profits of banks Bank stabilitycreates a more favorable environment for both investors and depositors, providing capital

at a stable price for the borrower

In summary, financial institutions are considered the lifeblood of the economy and thebanking sector is the most vital institution for growth and economic development Bankscalled financial intermediaries are the key sources of funding businesses, enhance economicgrowth, and contribute to financial stability against the shocks of financial crises as the mainrole of banks as institutions of financial intermediation is to allocate deposits as a surplusfund from lenders asa surplus unit and to support the deficitin units, borrowers or investors

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effectively and efficiently In this regard, the banking system plays meaningful and usefulfunctions that mostly deal with wealth and capital These functions are especially related tomonetary activities and include economic scarcity eradication, capital mobilization, andallocation ofmunicipal funding, etc Likewise, the banking system also plays an essentialrole

in connecting economic units and individuals through stocks and bonds in the financialmarkets, which are highly sensitive to fluctuations in interest rates Besides the significantrole that banks play in financial intermediation, banks also run the wheels of overall

economic relations using the wealth that is created through the process of financial

intermediation Moreover, banks have a crucial role in ensuring financial stability andfinancing businesses in the real economy Hence, a sound and productive banking sector

contributes to growth, economic development and financial stability On the contrary, a decline in bank stability or performance has an adverse impact on economic development and growth In this context, the strength of the banking system in a country is an essential condition to ensure continued economic growth and financial stability Thus, it could be said that the profitability of banks enables economies to withstand the risks of external financial shocks.

2.3 Geopolitical risk and bank stability

A flurry of geopolitical change and political upheaval is raising fundamental questionsabout the potential impact on the banking industry According to a global survey report

issued EY(US) in 2022, geopoliticalrisks affecting banks or banks’ customers have expanded

significantly in recent years, In this context, the banking industry is affected by both supplyand demand sides Political instability, increased risks may lead banks to increase interest

rates, increase credit costs, thereby reducing the demand of economicunits Geopolitical risk

is associated with negative investor sentiments; investors become increasingly worried about losing money, causing them to reorganize their portfolios by moving their investment

from riskier investments to safer assets, thereby reducing liquidity, particularly among

banks Shleifer and Vishny (2010) proposed a theory of unstable banking, which shows that banks are influenced by investor sentiments Banks make, securitize, distribute, and trade loans, hold cash, and borrow money, using their security holdings as collateral Their theory

predicts that bank credit and real investment will be volatile when market prices of loans

are volatile and that any source of investor sentiment fluctuations can significantly

undermine bank stability Since geopolitical riskis linked to investor sentiment fluctuations,

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lower credit growth, profit variability, and higher probability of default (Brandt and Gao,2019; Zhou et al., 2020), it is expected to make banks more unstable or fragile.

An increase in tensions between an investing and a recipient country, such as betweenthe United States and China since 2016, reduces overall bilateral cross-border allocation ofportfolio investment and bank claims by about 15 percent Investment funds are particularlysensitive to geopolitical tensions and tend to reduce cross-border allocations notably tocountries with a diverging foreign policy outlook Furthermore, Citigroup, which had beentrying to sell its Russian retail operations when the war started, saidits potential losses couldcome to as muchas $3 billion, and put aside $1 billion in loan-loss reserves JPMorgan said it had provisioned roughly $300 million to cover markdowns on its Russian loans The bank also attributed $120 million of a $524 million trading loss during the first quarter to its role

as one of the counterparties in a short trade by Chinese metals group Tsingshan that wentsouth amid the market turmoil that followed the outbreak of war Goldman Sachs,

meanwhile, which in February disclosed that its Russian exposure was $650 million, said it

had suffered a net loss of about $300 million on investments in Russia and Ukraine.

In September 2022, the European Systemic Risk Board issued an unprecedentedgeneral warning (ESRB, 2022) This warning, adopted by its General Board in which allEuropean Union central banks and other EU-level supervisors are represented, identifiedthree severe systemicrisks: a looming recession that mightstrain the debt-servicing capacity

of companies and households; overvaluation in asset prices; and lingering asset-qualityproblems in banks These risks could be further aggravated if real-estate markets decline,

and if sovereign debt in individual EU states becomes distressed.

Recent trade tensions, the COVID-19 crisis and Russia’s war in Ukraine have amply

underlined that banks are strategically vulnerable This has already led to a profound shock

to energy prices and supply security, which, by extension, will impact credit quality incompanies and households Geopolitical risks are widely understood to relate to wars,

terrorist acts and tensions between states that affect the normal and peaceful course of international relations, and the way states go about controlling and competing for territory

(Caldara and Iacoviello, 2022) Manifestations of such risks seem to be infrequent, though

potentially cataclysmic, resulting in loss of life and capital in times of war Yet, ongoing

threats are also material Trade tensions between the United States and China may lead to atechnological decoupling that will impact foreign direct investment stakes of foreign

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companies in China and force a re-configuration of supply chains Sanctions and sanctions may also affect third states and unsanctioned foreign financial institutions.

counter-Greater and more variable geopolitical risk has been linked to volatility in financialassetvaluations (Alexander & Bruegel, 2022) Most market participants therefore track a set

of specific riskindicators Geopolitical risk also depresses corporate capital expenditures, inparticular in industries with a high degree of investmentirreversibility (Dissanayake et al,2018) The link to bank stability is less well studied, but is of course intuitive, given banks’various exposures to the corporate sector and trade finance, and given their externalfinancial assets Phan et al (2022) documented a direct link between risk indicators and bankstability, with common prudential buffers muting this effect In a period of globalization, thefinancial system may now become more fragile as the gains from diversification and access

to high growth markets are reversed (Buch, 2022) Geopolitical risks have so far been largely

a marginal consideration in banks’ risk management and in bank supervision, but may now

need to be more in focus.

2.4 Literature review

2.4.1 Geopolitical Risks

The geopolitical risk can be described as the risk connected with some crisis (e.g., wars, terrorist attacks, and conflicts between nations), which in turn substantially impacts international relations’ peaceful, regular flow (Lee et al 2021a) Geopolitical risk encompasses both the likelihood that these risks will occur as well as the additional risks brought on by an intensification of current events (Caldara and Iacoviello 2018) In other words, such risks could raise tensions at both national and international levels According to

Olasehinde-Williams and Balcilar (2022), concerns regarding geopolitical risks have grown

recently as a result of recent geopolitical conflicts and tensions between countries all over the world This reflects the fact that both academic economists and policymakers pay close

attention to GPR (B Li et al 2020) Geopolitical risk are considered one of the most crucial

factors affecting businesses belonging to different sectors Geopolitical risk are currently ranked among the top five global business threats (e.g., Lee et al 2021b) Similarly, prior

studies were conducted to highlight the major consequences of Geopolitical risk amongdifferent settings and facets, such as energy (e.g., Su et al 2021), trade flows (e.g., Gupta et

al 2019), stock market returns (e.g., Apergis et al 2018; Oloko etal 2021), investment (e.g.,Bilgin et al 2020), renewable energy consumption (e.g., Cai & Wu, 2020), renewable energy

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deployment (e.g., Sweidan 2021) oil prices (e.g., Ding et al 2022; Fernandois and Medel2020; J Li et al 2020; Zhang et al 2022), insurance premiums (Olasehinde-Williams andBalcilar 2022), tourism investment and tourism destination selection (e.g., Lee et al 2021b),etc In addition, Demiralay and Kilincarslan (2019) indicated that GPRs are referred to as one

of the key factors influencing consumption and investment-associated decisions Due to theprecautionary saving motivation, Geopolitical risk and uncertainty may cause businesses todefer investments and delay consumption (Cheng and Chiu 2018) Moreover, Zhao et al

(2021) argued that environmental and economic indicators can be affected by geopolitical

risks in a way that makes nations more likely to lose their welfare benefits

Compared to the index of economic policy (Baker et al., 2016) and the stock market

fluctuation index (Bloom, 2009), the GPR index reflects more accurately the fluctuations of

geopolitical events Related, such as Russia's merger of Crimea, or instability related toterroristattacks (Demir et al., 2019) Since its inception, this index has received the attention

of many researchers because it has a strong impact on economicvariables at both macro and

micro levels For example, Akadiri et al (2019) found that GPR negatively affects econo mic

growth both in the short and long term, evidence from a significant decline in real GDP

during a period of instability Cheng and Chiu (2018) pointed out the consistent evidencethat global geopolitical shocks lead to GDP reduction from 13 to 22% in 38 emerging

countries Antonakakis et al (2017) found a mixed relationship between GPR and profit and oil fluctuations Wang and Young (2020) proves that GPR from terrorist attacks is the main driving force for strong fluctuations and decline in profits of stock markets.

According to Ding et al (2022), the frequent occurrence of Geopolitical risk, and the associated economic and trade friction, hinders the financial market’s smooth development and interferes with various nations’ normal economic activity The consequences of Geopolitical risk vary across different economic sectors For instance, Lee et al (2021b)

indicated that geopolitical risk have a significant impact on the socioeconomic environment

and frequently cause problems in different contexts and settings (e.g., Geopolitical risk lead

to a reduction in the amount of tourism that goes to the impacted areas) In addition, Gupta

et al (2019) analyzed the impact of geopolitical risk on trade flows in 164 countries The

study results demonstrated how geopolitical risks negatively affect trade flows Many

studies have tested the relationship between Geopolitical risk and investment in different

economies One study reported that GPRs positively affect governmentinvestment (Bilgin et

al 2020) While Zhou et al (2020) concluded that higher GPR index levels reduce the

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domestic credit made available by the financial sector Geopolitical risk have also served toexplain the variations in outputs amongsta sample of 38 developing countries (Cheng andChiu 2018) Apergis et al (2018) reported no evidence of any predictive capacity ofGeopolitical risk for stock market returns Similarly, Balcilar et al (2018) examined theimpact of geopolitical uncertainty on trends in returns and volatility of the BRICS stockmarkets but found that geopolitical risk caused stock market volatility Additionally, Bouri

et al (2019) reached similar conclusions when examining the effects of geopolitical

uncertainties on the volatility of Islamic equities and bonds Oloko et al (2021) incorporated

the predictability approach with a quasi-generalized least square model to analyze theKorean stock market according to geopolitical risks The results found that the geopolitical

risk did affect Korean stock market returns.

Geopolitical risk generate several consequences for energy consumption andproduction which are also reflected in the case of the conflict between Russia and Ukraine

This conflict has triggered an adverse effect on stock markets, energy consumption, and

production, in addition to increases in energy prices Fernandois and Medel (2020)

introduced the Granger causality model to examine the impact of geopolitical tensions and unexpected changes in oil prices In turn, Cai and Wu (2020) apply the time-varying

parameter of the Bayesian vector autoregressive model to analyze the relationship betweenGPRs and renewable energy consumption

The findings convey how geopolitical risk provide a positive effect on renewable

energy consumption Similarly, Su et al (2021) states that there is a two-way relationship

between geopolitical risks and energy Ivanovski and Hailemariam (2022) applied a nonparametric model to study the effects of oil prices on geopolitical risks Their data was sourced from 16 countries and covered the period from 1997 to 2020 with the findings demonstrating how oil prices negatively relate to geopolitical risks Gkillas et al (2018)

approached the relationship between geopoliticalrisk and regime change over a two-decade

period and reported that geopolitical risk contributed to the regimes.

Furthermore, Olasehinde-Williams and Balcilar (2022) stated that the macroeconomic

and financial cycles in many countries are significantly impacted by geopolitical risk which,

at present, top the list of concerns for multinational corporations This impression is not

anticipated to change over the coming years B Li et al (2020) argued that for the West TexasIntermediate (WTI) and Brent markets, geopolitical risk positively influence oil prices,

however, the effect is the opposite for the Dubai and Nigerian markets Oil prices have a

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