Impact of global economic policy uncertainty on the performance and risk of Vietnamese banks: the moderating role of bank capital

By mid-2025, the global economic landscape has experienced complex fluctuations, notably the escalating trade tensions between the United States and its key trading partners, including Vietnam. These developments, alongside significant geopolitical and economic events such as the COVID-19 pandemic and the Russia–Ukraine conflict, have driven global Economic Policy Uncertainty (EPU) (GEPU) to historically high levels (Dang et al., 2025a; Duan et al., 2022; Liu and Zhu, 2024). This rising trend of uncertainty is clearly illustrated by the sharp volatility of the GEPU index shown in Figure 1 (see Appendix), with notable spikes around the 2008 financial crisis and a series of persistent shocks since 2016.

EPU exerts adverse effects on various aspects of the economy (Al-Thaqeb and Algharabali, 2019). Among these, the banking sector – functions as a financial intermediary grounded in trust, liquidity, and credit risk – is particularly sensitive to uncertainty. This has attracted considerable scholarly attention in examining the effects of EPU on the banking system (Dang et al., 2025a; Danisman and Tarazi, 2024), especially since the 2008 financial crisis (Tran et al., 2025). The existing literature demonstrates that EPU reduces credit growth (Bordo et al., 2016), erodes profitability (Athari, 2021; Nasim et al., 2026; Ozili and Arun, 2023), increases non-performing loans (NPLs) (Chi and Li, 2017) and undermines the overall stability of the banking system (Nguyen, 2021b; Olalere and Mukuddem-Petersen, 2024; Phan et al., 2021; Shabir et al., 2021). Although studies on the impact of EPU on bank performance and stability have been conducted across broad cross-country samples (Biswas et al., 2025; Vuong et al., 2024; Wang et al., 2025) as well as within specific countries (Danisman and Tarazi, 2024; Liu, 2024; Mawardi et al., 2025), important research gaps remain

First, prior studies have produced heterogeneous results, making it difficult to generalize their findings into consistent rules applicable across different contexts. Moreover, evidence from developing economies remains relatively limited. We aim to address the case of Vietnam, where no prior study has examined the effects of EPU on bank performance and risk. This is particularly important as Vietnam, a developing country in Southeast Asia with high economic openness, maintains special economic ties with both China and the United States (Dhar et al., 2023; Yu, 2020), two economies that have been at the epicenter of recent EPU.

Second, earlier studies have often lacked robustness tests of the impact of EPU on bank profitability and risk, leading to concerns about the durability of their findings. Zhang et al. (2019), for instance, highlighted that US–China tensions could be a key source of global economic uncertainty. Accordingly, this study incorporates the US–China Tension Index to examine its effects on bank profitability and risk as a robustness test, thereby enhancing the reliability of the analysis.

Third, this study constitutes an initial effort to examine the moderating role of bank capital in the relationship between GEPU and bank performance and risk in Vietnam. Following the 2007–2008 Global Financial Crisis, bank capital has been widely regarded as a key factor that can help banks maintain stability in the face of external shocks (Anginer et al., 2018; Miao et al., 2025). In essence, higher bank capital strengthens banks' accountability for their own funds, thereby curbing risk-taking, and promoting more stringent screening and monitoring of loan portfolios when EPU rises (Danisman and Tarazi, 2024). However, an alternative view argues that banks operate intrinsically in a risk-laden environment, and increases in bank capital do not necessarily alter risk-taking investment strategies (Toh and Zhang, 2022). Banks may even become more complacent and engage in greater risk-taking when EPU intensifies (Jiang et al., 2020), particularly in emerging economies where banks face persistent incentives to expand and grow stronger (Miao et al., 2025). Accordingly, given the mixed evidence in prior studies and the context of Vietnam as a rapidly developing economy, we contend that bank capital should be explicitly considered in assessing how GEPU affects bank performance and risk. Currently, the Vietnamese banking sector mainly applies Basel II; although the State Bank aimed for full implementation by 2023, only about 40% of banks have met this target (Ngo and Trinh, 2025). By the first quarter of 2024, several Vietnamese commercial banks announced that they had completed Basel III implementation (Nguyen and Nguyen, 2024). The entire sector is now transitioning to Basel III under Circular No. 14/2025/TT-NHNN, issued on 30 June 2025 and effective from 15 September 2025, which strengthens the capital adequacy framework to enhance resilience to global risks. The average capital adequacy ratio (CAR) of Vietnamese banks is currently only around 8% (Ngo and Trinh, 2025). From 15 September 2025, the minimum CAR requirement is 8%, gradually increasing to 10.5% by 2033; from 1 January 2030, full Basel III standards on common equity Tier 1 and Tier 1 capital will be enforced, requiring banks to raise charter capital and improve risk management.

Building on these arguments, this study contributes to the ongoing debate on the impact of GEPU on the banking system in several dimensions. First, it provides the first evidence on how GEPU affects bank performance and risk in the Vietnamese context. Second, it incorporates the US–China Tension Index as a robustness test alongside the main explanatory variable, the GEPU Index, to strengthen the credibility of the findings. Third, it clarifies the moderating role of bank capital in the relationship between EPU, bank performance, and bank risk in a developing country setting, namely Vietnam.

Our findings show that GEPU reduces bank performance and increases bank risk. These results hold whether GEPU is represented by the global EPU Index or the US–China trade tension index. Furthermore, the study finds that banks with higher equity ratios are better able to mitigate the negative effects of GEPU on both performance and risk. The results of this study are expected to serve as an important reference for relevant stakeholders, including bank managers and government regulators in Vietnam and other countries with similar economic contexts and development levels. These findings can inform the design of strategies aimed at ensuring the stability and sustainable development of the banking system amid mounting GEPU.

The EPU Index is a measure of economic uncertainty associated with policy. Baker et al. (2016) constructed this index by counting the frequency of articles in major newspapers containing three categories of keywords simultaneously: (1) economy/economic, (2) uncertain/uncertainty, and (3) policy-related terms (e.g. Congress, regulation, Federal Reserve, legislation, White House) for each country. Subsequently, Davis (2016) developed the GEPU Index, which is calculated as a GDP-weighted average of national EPU indices from 22 major economies, aiming to capture the effects of globally driven EPU shocks (Dang et al., 2025a, b). Higher values of these indices indicate higher levels of EPU.

EPU has been shown to be a strong cross-border spillover phenomenon (Bernal et al., 2016; Duan et al., 2022), with shocks transmitted particularly strongly to developing countries and highly open economies (Gao et al., 2025; Luk et al., 2020). In this context, Vietnam emerges as a particularly vulnerable case with respect to GEPU. As a small-sized economy with trade openness among the highest in the world (Nguyen, 2021a) and deep integration into global value chains, especially through close trade linkages with major partners such as the United States and China (Dhar et al., 2023), GEPU shocks are expected to spill over and significantly affect the domestic macroeconomic environment (Gao et al., 2025).

From a theoretical perspective, the core transmission mechanism from policy uncertainty to the real sector is explained by the Real Options Theory (Bernanke, 1983; Bloom, 2009). This theory argues that when uncertainty is high, firms postpone investment decisions (such as building new plants or expanding markets), because these investments are costly and largely irreversible. This postponement (“wait and see”) leads to declines in aggregate demand, investment, and hiring, thereby slowing down economic recovery. These adverse effects constitute the starting point for the transmission of risk to the banking system (Olalere and Mukuddem-Petersen, 2024; Vuong et al., 2024; Wu et al., 2020).

The impact of GEPU on the Vietnamese banking system operates through two main mechanisms: trade (an indirect channel) and finance (a direct channel). First, through the indirect (trade-related) mechanism, higher GEPU is associated with rising tensions in global economic policies, including trade policies that reduce global demand and disrupt supply chains (Vuong et al., 2024; Wu et al., 2020). Meanwhile, Vietnam is an export-dependent economy, with exports accounting for around 90% of GDP in recent years. Consequently, exporting firms are adversely affected by the decline in global orders, which weakens their operating cash flows and debt-servicing capacity. This deterioration in borrowers' financial conditions impairs the quality of banks' loan portfolios. In other words, heightened credit risk leads to higher NPLs and lower bank profitability (Shabir et al., 2021).

Second, through the direct (financial) mechanism, an increase in GEPU triggers “flight-to-safety” behavior, whereby global investors tend to withdraw capital from emerging markets. This slows both foreign institutional investment and foreign direct investment and increases pressures for USD outflows, thereby raising demand for USD and exerting depreciation pressure on the Vietnamese dong (VND). To stabilize the exchange rate, the State Bank of Vietnam may respond by selling foreign exchange reserves or raising policy interest rates. Such actions increase funding costs for commercial banks, which in turn can compress their net interest margins (Wu et al., 2020). Overall, GEPU may reduce banks' operating profitability and increase credit risk.

The impact of EPU on bank performance can be explained from several theoretical perspectives. First, the theory of irreversible investment posits that once firms undertake investment projects, they cannot fully recover the capital invested if adverse shocks materialize (Bernanke, 1983). Therefore, the Real Options Theory suggests that firms optimally adopt a “wait-and-see” strategy until the high-risk period passes (Pindyck, 1986), especially when EPU renders future macroeconomic prospects ambiguous and difficult to forecast (Chi and Li, 2017). In other words, EPU activates a “caution effect” and a “delay effect” in firms' investment decisions (Gulen and Ion, 2016; Nguyen, 2021b), resulting in lower aggregate demand for credit (Nguyen, 2021b). Similarly, banks also adopt a “wait-and-see” stance and become more cautious in their lending approval decisions (Tran et al., 2025). These effects jointly lead to a significant slowdown in bank credit growth (Bordo et al., 2016; Chi and Li, 2017). Under such conditions of heightened uncertainty, the Uncertainty–Fragility hypothesis argues that banks face more intense competition to lend to a smaller pool of borrowers and may respond by cutting lending rates (Olalere and Mukuddem-Petersen, 2024; Wu et al., 2020). Moreover, as discussed above, when the central bank intervenes in financial markets to stabilize the exchange rate by raising domestic interest rates, and investors require higher expected returns in periods of EPU (Obenpong Kwabi et al., 2022), banks’ funding costs rise (Wu et al., 2020). These developments further compress banks’ net interest margins.

In addition, heightened EPU exacerbates information asymmetries (Francis et al., 2014; Ng et al., 2020), increasing the costs of screening and monitoring borrowers (De Silva et al., 2023; Nasim et al., 2026). Banks may also increase loan loss provisions when EPU rises, due to deteriorating operating cash flows and repayment capacity of firms (Chi and Li, 2017). Taken together, these channels imply that higher EPU can lead to a deterioration in banks’ operating profitability.

Empirical studies largely support a negative relationship between EPU and bank performance. Dang et al. (2025b) show that economic uncertainty—including global, trade, and EPU—adversely affects both the supply and demand for credit. Specifically, banks tend to tighten lending criteria, contract loan portfolios, and increase provisioning, while firms limit business expansion and prioritize internal financing. This simultaneous reduction in credit supply and demand narrows net interest margins and lower bank performance across 165 countries during 2000–2021. Similarly, economic uncertainty exacerbates information asymmetry, making it harder for banks to accurately forecast investment returns and increasing due diligence costs, thereby raising capital loss risks and reducing profitability in developed (G7) and emerging (E7) economies between 2001 and 2020 (Nasim et al., 2026). Belke et al. (2018) also document declining bank profitability in some Eurozone countries as banks cut lending during periods of high policy uncertainty. Likewise, Athari (2021) finds that the banking sector in Ukraine is highly sensitive to economic uncertainty, with political instability and heightened global EPU contributing to reduced profitability. Nevertheless, Ozili and Arun (2023) argue that the effects of EPU on banks are contingent on country- and region-specific characteristics. They provide evidence that, for a global sample of 384 listed banks across 47 countries spanning Africa, Asia, the Americas, Europe, and Oceania, EPU negatively affects non-interest income. However, when focusing only on Asia and the Americas, EPU shows a positive relationship with return on equity (ROE).

Carrière-Swallow and Céspedes (2013) demonstrate that, relative to advanced economies, emerging markets are more strongly affected by exogenous global uncertainty shocks, as reflected in sharper declines in investment and private consumption, longer recovery periods, and a slower return to subsequent growth. Moreover, evidence from related studies indicates that a global uncertainty shock originating in the United States can severely affect capital flows and exert adverse impacts on exchange rates and interest rates, while also inducing credit contractions in emerging economies (Bhattarai et al., 2020; Choi, 2018). As noted above, Vietnam is likewise an emerging economy that is highly export-dependent, characterized by substantial trade openness, and maintains particularly strong trade ties with both the United States and China. We therefore expect GEPU to have adverse implications for Vietnam's banking system. Put differently, drawing on theory, prior empirical evidence, and Vietnam's institutional and macroeconomic context, we argue that the detrimental effect of GEPU on Vietnamese banks’ performance may operate through the following channels. First, heightened EPU depresses private consumption (Carrière-Swallow and Céspedes, 2013), which can strain firms' cash flows and, in turn, increase NPLs and loan-loss provisions, thereby reducing bank profitability (Chi and Li, 2017). Second, when consumption weakens and uncertainty intensifies, firms tend to postpone investment decisions (Carrière-Swallow and Céspedes, 2013; Nguyen, 2021b), leading to lower demand for bank credit. At the same time, banks' funding costs may rise during uncertain periods as depositors require higher returns (Obenpong Kwabi et al., 2022; Wu et al., 2020), which ultimately compresses net interest margins. Third, information asymmetry in Vietnam remains relatively pronounced (Huynh et al., 2020). At the same time, heightened economic uncertainty tends to exacerbate information friction (Ng et al., 2020). Moreover, under conditions of limited information and constrained resources, banks may be more inclined to engage in herd lending behavior, which heightens the likelihood of credit losses and consequently further reduces bank profitability. As a result, banks may face higher screening and monitoring costs (Nasim et al., 2026)¸ which ultimately erode bank profitability.

Accordingly, we propose to test the following hypothesis regarding the impact of EPU on bank performance in the Vietnamese context as follows:

As discussed above, under Real Options Theory, banks may adopt a “wait-and-see” strategy during periods of heightened economic uncertainty because of concerns about the irreversibility of their investment and lending decisions. This strategy helps banks avoid activities associated with excessive optimism, which could otherwise lead to rapid credit expansion and higher latent risk (Wu et al., 2020). However, this view is dominated by the opposite argument, namely that EPU can increase bank risk through several reinforcing mechanisms.

First, banks may become more vulnerable to the adverse effects of EPU on real economic activity. EPU increases the probability of economic recessions (Baker et al., 2016; Nguyen, 2021b), reduces firms’ operating cash flows and raises the likelihood of corporate failure (Chi and Li, 2017), ultimately leading to an increase in banks’ NPLs (Nguyen, 2021b).

Second, EPU can erode bank profitability (as posited in Hypothesis H1). As a result, bank managers have stronger incentives to “search for yield” by shifting toward riskier activities and projects (De Silva et al., 2023; Rajan, 2006; Wu et al., 2021), thereby contributing to higher financial instability (Nguyen, 2021b; Wu et al., 2020).

Third, banks tend to exhibit herding behavior in their lending decisions under conditions of EPU. Such uncertainty exacerbates information asymmetry: banks are unsure which sectors and borrowers regulators are likely to prioritize and support, making it difficult to correctly identify the industries and clients that truly deserve credit allocation (Chi and Li, 2017). In addition, banks incur higher costs and face greater difficulty in screening and assessing borrowers’ risk (De Silva et al., 2023; Nasim et al., 2026; Shabir et al., 2021). Consequently, under competitive pressure, banks are inclined to downplay their own independent analyses and instead mimic the actions of other banks (Ng et al., 2020; Nguyen, 2021b; Wu et al., 2020). As a result, they find it harder to correctly price the future risks faced by firms and may become more complacent about overall risk, leading to excessive investment in risky assets (Ng et al., 2020; Nguyen, 2021b; Wu et al., 2020). Even when bank managers are aware of the risks associated with herding, they may still pursue strategies and decisions similar to those of their competitors to avoid being perceived as underperforming the market and to reduce the likelihood of being disciplined by shareholders for short-run profit declines (Nguyen, 2021b).

Empirical studies largely confirm that economic uncertainty raises bank risk. In a cross-country setting, Vuong et al. (2024) examined the effects of macroeconomic uncertainty on the stability of banks in ASEAN-8 during 2010–2020, finding that most global macroeconomic shocks—including geopolitical risk (GPR), EPU, climate policy uncertainty, world pandemic uncertainty, global supply chain pressure, and monetary policy uncertainty (MPU)—undermine bank stability. Karadima and Louri (2021) focusing on four major euro-area economies (France, Germany, Italy, and Spain), confirm that EPU acts as a trigger and transmission channel for the emergence and propagation of banks' NPLs. Similarly, Saliba et al. (2023) report that GEPU is positively associated with rising credit risks among BRICS banks. At the country level, Chi and Li (2017) show that EPU is positively correlated with NPLs, thereby increasing credit risks for Chinese banks. Ng et al. (2020) likewise provide robust evidence that policy uncertainty is associated with adverse macro- and microeconomic conditions, under which US banks face greater NPL risk and set aside higher loan-loss provisions. They therefore suggest that banks behave more prudently during periods marked by elevated uncertainty and economic distress. In the developing-country context of Tunisia, Hamdi and Hassen (2022) find that EPU increases bank credit risk, reduces loan volumes, and deteriorates bank performance. Related studies document broadly consistent results (Duan et al., 2022; Wang et al., 2025).

Consistent with the reasoning behind H1, emerging economies tend to bear disproportionately severe consequences of global uncertainty shocks. We further argue that the channels through which GEPU affects bank risk in Vietnam are broadly similar to those operating for bank profitability. First, heightened GEPU can sharply depress aggregate demand (Carrière-Swallow and Céspedes, 2013) and hinder trade flows. At the same time, firms face higher borrowing costs and tighter bank lending standards (Bhattarai et al., 2020; Choi, 2018). Taken together, these conditions weaken firms' financial capacity and reduce their ability to service debt as it falls due, thereby increasing banks' exposure to NPLs (Chi and Li, 2017). Second, a contraction in credit supply reduces banks' income. Yet, shareholders may continue to demand competitive returns, strengthening banks’ incentives to “search for yield” by shifting toward riskier projects to sustain profitability. This behavior can ultimately translate into higher NPLs (De Silva et al., 2023; Nguyen, 2021b). Third, information asymmetry in Vietnam is likely to intensify during periods of elevated policy uncertainty (Huynh et al., 2020; Ng et al., 2020). Consequently, banks may find it more difficult and resource-intensive to screen and select high-quality borrowers. In some cases, they may resort to herd-like lending behavior, which further increases exposure to NPLs (Ng et al., 2020; Wu et al., 2020). In addition, banks in emerging economies often face persistent incentives to expand and grow stronger (Miao et al., 2025). In Vietnam, the government's emphasis on ambitious annual growth targets may also create lending pressures on banks, which can amplify credit risk. Accordingly, we propose to test the following hypothesis:

As discussed above, EPU can generate adverse consequences for banking activity, in terms of both profitability and risk. Policymakers and bank managers therefore need to understand whether greater bank capital participation can mitigate these effects. Our study contributes to this issue by further elucidating the moderating role of bank capital in the relationship between GEPU and banks' profitability and risk. Following the 2008 global financial crisis, in order to prevent systemic risk and enhance banks’ resilience, most countries tightened capital adequacy requirements in line with the Basel III framework (Miao et al., 2025). From a theoretical standpoint, greater reliance on equity financing is not always the optimal solution for maximizing profitability. The capital structure theory of Modigliani and Miller (1958) highlights the benefits of financial leverage, particularly the tax shield arising from interest expenses. Accordingly, increasing the equity ratio (reducing leverage) may decrease ROE. This perspective is supported by recent empirical evidence from Vietnam (Dang, 2019) and Indonesia (Puspitasari et al., 2021), which concludes that banks with larger capital buffers tend to assume less risk but are also less profitable.

Considering the moderating role of bank capital, we argue that the adverse effect of GEPU on Vietnamese banks’ performance can be attenuated by bank capital through several channels. First, bank capital may mitigate the negative impact of GEPU on bank profitability through the pricing channel. As discussed above, GEPU can raise funding costs and reduce bank credit volumes, thereby weakening bank profitability. At the same time, heightened GEPU may induce depositors and investors to engage in a flight to quality, shifting funds toward banks perceived as safer. Well-capitalized banks are often viewed as safe havens (Tran and Nguyen, 2023), which allows them to maintain lower and more stable funding costs than thinly capitalized banks, thereby supporting their profit margins. By contrast, banks with weaker capital buffers frequently need to offer higher deposit rates to retain customers, further increasing their funding costs and compressing their net interest margins (Valencia, 2017). Second, bank capital may also reduce the adverse effect of GEPU on bank profitability through the screening channel. As noted earlier, GEPU can lead to suboptimal financing decisions under heightened information asymmetry, resulting in credit losses and lower bank profitability. However, these outcomes may be mitigated when shareholder participation, as reflected in bank capital, is stronger. Indeed, better-capitalized banks tend to be more committed to the bank's long-term soundness and bear greater responsibility for shareholders' equity (Berger and Bouwman, 2013), because they have more at stake (Danisman and Tarazi, 2024). Accordingly, they are more likely to strengthen borrower screening and monitoring, which reduces default probabilities (Danisman and Tarazi, 2024) and, in turn, lowers the need for loan-loss provisioning. Based on the above arguments, we propose to test the following hypothesis:

Similarly, bank capital may moderate the effect of GEPU on banks' NPL risk through several channels. First, bank capital can weaken the positive impact of GEPU on NPL risk via the pricing channel. As discussed, well-capitalized banks tend to enjoy stronger reputation and credibility, allowing them to raise funds at lower and more stable costs. Consequently, they face less pressure to shift their asset portfolios toward riskier exposures in pursuit of superior returns (Miao et al., 2025), implying lower potential NPL accumulation.

Second, bank capital may moderate the effect of GEPU on NPL risk through the screening channel. We expect that GEPU reduces credit growth and bank profitability, thereby strengthening incentives for “search for yield” behavior aimed at restoring earnings, which can translate into higher NPL risk (De Silva et al., 2023). However, for banks with higher levels of bank capital, their interests are more closely aligned with those of depositors, and they become more reluctant to undertake aggressive risk-taking because they have more to lose (Danisman and Tarazi, 2024; Miao et al., 2025). Accordingly, they have weaker incentives to “search for yield,” which helps curb potential NPL formation. Moreover, well-capitalized banks typically have greater resources to conduct more rigorous borrower screening and more effective loan monitoring (Danisman and Tarazi, 2024; Mehran and Thakor, 2011), thereby lowering default probabilities and reducing NPL risk.

Nevertheless, an alternative strand of the literature argues that banks remain profit-oriented firms operating in inherently risky environments. Regardless of whether capitalization is high or low, banks may still be driven by incentives to “grow larger and stronger,” particularly in fast-growing emerging economies (Miao et al., 2025). When confronted with uncertainty shocks, banks often increase capital buffers to reinforce stability, yet in many cases they do not meaningfully adjust their risk-taking investment strategies (Toh and Zhang, 2022). A large capital buffer may even induce complacency, leading banks to underestimate risk accumulation and become more willing to take on additional risk (Jiang et al., 2020). In Vietnam, however, the State also participates as a shareholder in several large banks, and the State Bank of Vietnam follows a cautious policy stance by imposing credit growth ceilings and tightening lending to high-risk sectors. These measures create multiple layers of control: thinly capitalized banks are subject to stricter supervision and more constraints on balance-sheet expansion when macroeconomic conditions are unstable. By contrast, banks with higher equity capital are allowed to operate more flexibly but still within a prudential supervisory corridor, thereby both maintaining resilience to risk and limiting incentives to pursue excessively risky strategies during periods of rising GEPU. These institutional features strengthen the disciplining role of capital in Vietnam, making it more likely that higher equity capital will dampen the positive effect of GEPU on bank risk. Hence, we propose to test the following hypothesis:

Based on the ideas developed in previous studies (Dang et al., 2025b; Danisman and Tarazi, 2024; Nasim et al., 2026; Zhang et al., 2022), we propose the following empirical models to examine the impact of GEPU on bank performance and risk in the case of Vietnam:

In this formulation, the variables used in the above research models are defined and measured as shown in Table 1.

Rapid credit growth (GROW_CRE) may be accompanied by a relaxation of lending standards, which can lead to deteriorating asset quality and heightened risk (Chi and Li, 2017; Dang and Dang, 2020). Interest expenses (INC) are measured as the ratio of interest expenses to total assets. Banks with lower funding costs enjoy a competitive advantage and higher profitability (Durand and Le Quang, 2022). Meanwhile, operating costs (COST), measured as the ratio of operating expenses to total assets, reflect the efficiency with which banks manage non-interest expenses. Numerous empirical studies have demonstrated a negative relationship between operating costs and bank profitability (Puspitasari et al., 2021; Siddique et al., 2021). However, an increase in operating expenses may also result from strategic investments in technology, branch networks, or human resources aimed at strengthening competitiveness, which can potentially generate higher profits in the future (Jawad et al., 2021). Bank size (SIZE), measured as the natural logarithm of total assets, is another important determinant. Larger banks may benefit from economies of scale, better diversification, and stronger market positions, thereby operating more efficiently and with greater stability (Ekinci and Poyraz, 2019; Noman et al., 2017). On the other hand, larger banks may become excessively complex to manage and more prone to risk-taking due to perceptions of being “too big to fail” (Danisman and Tarazi, 2024). Economic growth (GDP) is generally expected to positively affect bank performance, as it stimulates credit demand and enhances borrowers' repayment capacity, thereby increasing bank profitability (El Khoury et al., 2023; Nasim et al., 2026; Yuen et al., 2022). Nevertheless, some studies have found the opposite effect (Dang and Dang, 2020; Dang, 2019; De Leon, 2020) arguing that during periods of strong economic growth, banks tend to expand credit aggressively, leading to weaker risk management. Inflation (INF) influences bank performance and risk depending on banks’ forecasting capacity (Perry, 1992). If banks can adjust lending rates more quickly than funding costs and operating expenses, inflation may have a positive impact on profitability (Ekinci and Poyraz, 2019; Pham et al., 2025). Conversely, high and volatile inflation can increase costs, erode the real value of income streams, and create macroeconomic instability, thereby negatively affecting performance (El Khoury et al., 2023; Nguyen and Lee, 2021).

This study uses data from 26 Vietnamese joint-stock commercial banks over the period 2010–2024. All bank-related data were collected from the Fiinpro database. Data for the GEPU Index were obtained from Link to the website. Data on GDP growth and inflation (INF) were retrieved from the World Bank.

Table 3 (see Appendix) presents the descriptive statistics of the variables used in the analysis. Bank performance (ROA) ranges from a minimum of −0.045 to a maximum of 0.048; NPL ranges from a minimum of 0.005 to a maximum of 1.249. The equity ratio (EA) exhibits a wide dispersion, ranging from −0.070 to 0.256, reflecting considerable differences in capital adequacy levels and the presence of financial distress in some banks in the sample. Overall, the distributional characteristics of the variables showed minimal differences between the mean and median values. Therefore, the dataset generally follows a normal distribution and is suitable for conducting regression estimations for the proposed models.

Table 4 (see Appendix) presents the correlation matrix of the variables. According to Gujarati and Porter (2009), if the correlation coefficient between independent variables is less than 0.8, multicollinearity is not considered a serious issue. The correlation coefficients among the independent variables are generally low. The highest correlation is observed between inflation (INF) and interest expense (INC), with a value of 0.668, and between bank size (SIZE) and equity ratio (EA), with a value of −0.621. However, all of these values remain below the 0.8 threshold. Therefore, it can be concluded that the regression models used in this study do not suffer from severe multicollinearity problems.

This study employs panel data from Vietnamese commercial banks. For model estimation, the Feasible Generalized Least Squares (FGLS) method is considered. GLS is capable of addressing issues such as heteroskedasticity and autocorrelation in the error terms. However, problems related to endogeneity and persistence, which are often overlooked in GLS, may compromise the reliability of estimation results (Siddique et al., 2021). To address these limitations, the study adopts the two-step System Generalized Method of Moments (GMM) (system GMM) as the primary estimation technique. This dynamic panel estimation method is specifically designed to address endogeneity issues by using lagged values as instruments, while also accounting for the persistence of dependent variables (Ely et al., 2021; Nguyen, 2021b; Zhang et al., 2022). Bank capital (EA) may affect bank performance and risk, while, conversely, performance and risk may feed back into bank capital. Thus, bank capital is treated as an endogenous variable. We use lagged values of EA as instruments. In addition, to guard against potential endogeneity issues arising from other explanatory variables, we also use lagged values of all regressors as instruments (Nguyen, 2021b). The use of GMM has been widely adopted in recent empirical studies with similar contexts to ensure robust and efficient estimates (Chau and Oanh, 2023; Killins et al., 2019; Tan et al., 2017). Moreover, the validity of the GMM models is tested using the Arellano-Bond test for second-order autocorrelation (AR(2) test) and the Hansen test for over-identifying restrictions. The GMM estimation results are considered reliable when there is no evidence of second-order autocorrelation and when the instruments used are valid (Olalere and Mukuddem-Petersen, 2024; Shabir et al., 2023).

Table 2 presents the regression results on the impact of GEPU and equity capital (EA) on bank performance (ROA) and risk (NPL) of Vietnamese commercial banks. Models (1) and (2) are estimated using the GLS method, while models (3) and (4) are estimated using the two-step system GMM approach. As discussed in the methodology section, endogeneity issues among the variables may cause the GLS estimation results to be biased (Chowdhury et al., 2017; Siddique et al., 2021). Therefore, the two-step system GMM was employed as the primary estimation method to ensure the robustness and reliability of the results. The validity tests for the GMM models, including the AR(2) test and the Hansen test, show p-values greater than 0.1, confirming the appropriateness and validity of the system GMM estimation (Miao et al., 2025). As a result, the following discussion is based primarily on the results from models (3) and (4).

The regression results reported in Table 2 show that the coefficient of GEPU is −0.0129 at the 1% significance level and 0.0479 at the 5% significance level in Models (3) and (4), respectively. These results lend support to hypotheses H1 and H2. In addition, the interaction term GEPU × EA has a coefficient of 0.1759 with 1% statistical significance and −0.8382 with 1% significance in Models (3) and (4), respectively. These findings provide evidence in favor of hypotheses H3 and H4. Furthermore, the coefficient of EA is −0.7767 at the 1% significance level in Model (3) and 4.4194 at the 1% significance level in Model (4).

First, as reflected in the regression results, the study finds strong empirical evidence of the negative effect of GEPU on bank performance. In other words, GEPU reduces the profitability of Vietnamese banks. This finding is consistent with prior empirical evidence (Athari, 2021; Belke et al., 2018; Nasim et al., 2026).

Thus, this adverse effect may stem from a deterioration in overall economic conditions as GEPU rises (Baker et al., 2016; Nguyen, 2021b). In particular, emerging economies with high trade openness, such as Vietnam, are likely to be more severely affected through declines in aggregate investment and private consumption, disruptions to international capital flows, and heightened volatility in exchange rates, interest rates, and bank credit (Bhattarai et al., 2020; Carrière-Swallow and Céspedes, 2013; Choi, 2018), thereby undermining bank performance. Accordingly, we argue that the negative impact of GEPU on Vietnamese banks’ profitability can be rationalized via several key channels. First, policy uncertainty depresses private consumption (Baker et al., 2016; Carrière-Swallow and Céspedes, 2013), increases firm failure risk and bankruptcy likelihood, and ultimately raises NPLs and loan-loss provisions, which erode bank profits (Chi and Li, 2017; Ozili and Arun, 2023). Second, when consumption weakens and uncertainty intensifies, firms adopt a “wait-and-see” stance and postpone investment decisions in line with the theory of irreversible investment (Gulen and Ion, 2016; Nguyen, 2021b). Banks, in turn, proactively tighten lending standards (Bordo et al., 2016; Chi and Li, 2017) leading to a contraction in bank credit. At the same time, deposit funding costs tend to increase during uncertain periods (Obenpong Kwabi et al., 2022; Wu et al., 2020), ultimately compressing banks' net interest margins. This interpretation is consistent with evidence suggesting that Vietnamese commercial banks have experienced excess liquidity and limited lending opportunities when uncertainty rises (Asian Development Bank, 2024; Dang and Nguyen, 2021). Third, EPU exacerbates information asymmetry, already relatively pronounced in Vietnam (Huynh et al., 2020; Ng et al., 2020), thereby increasing banks' screening and monitoring costs (Nasim et al., 2026) and reducing profitability. Moreover, under heightened uncertainty, banks may find it more difficult to identify sectors with superior prospects, which can result in inefficient credit allocation and subsequent credit losses, further weakening bank performance (Chi and Li, 2017).

Next, our results also indicate that GEPU increases Vietnamese banks’ NPLs. This finding is consistent with several prior studies (Chi and Li, 2017; Danisman and Tarazi, 2024; De Silva et al., 2023; Saliba et al., 2023) and reinforces the uncertainty–fragility hypothesis. We contend that the channels through which GEPU elevates NPL risk mirror those through which it reduces bank profitability. First, GEPU heightens firms’ bankruptcy risk and transmits it to bank credit risk. Uncertainty can cause a pronounced decline in aggregate demand (Al-Thaqeb and Algharabali, 2019; Baker et al., 2016). Emerging economies such as Vietnam may be more sensitive to policy shocks (Carrière-Swallow and Céspedes, 2013), which adversely affect the operating cash flows of borrowing firms. Meanwhile, banks may charge higher borrowing costs under uncertainty (Bhattarai et al., 2020; Choi, 2018). The combination of weaker firm cash flows and higher debt-servicing burdens can increase corporate default risk and, in turn, raise banks’ NPLs (Chi and Li, 2017). Second, banks may have stronger incentives to “search for yield” by extending credit to riskier projects during uncertain times in order to meet shareholders’ profit expectations, thereby increasing potential NPL risk (De Silva et al., 2023; Nguyen, 2021b). In Vietnam's context, the government's persistent emphasis on strong growth targets may further pressure banks’ lending performance and risk-taking. Third, under severe information asymmetry, banks are more likely to make inefficient investment and financing decisions. As prior studies suggest, information asymmetry is relatively high in Vietnam (Huynh et al., 2020) and becomes even more acute during periods of EPU (Ng et al., 2020). Consequently, banks may face informational constraints and be more prone to herding behavior in lending and investment decisions, which can amplify NPL risk (Ng et al., 2020; Tran et al., 2025; Wu et al., 2020).

Our study further shows that, ceteris paribus, bank capital on its own may be associated with lower bank profitability, potentially because banks do not fully exploit financial leverage, consistent with prior evidence (Hacini et al., 2021; Nasim et al., 2026; Puspitasari et al., 2021). More importantly, our findings indicate that, under heightened GEPU, bank capital plays a crucial moderating role in shaping the effects of uncertainty on bank performance and risk. Specifically, the results suggest that bank capital mitigates the negative effect of GEPU on Vietnamese banks’ performance. This moderating effect can be explained through the following mechanisms. Along the pricing channel, better-capitalized banks tend to enjoy higher credibility and may serve as “safe havens,” attracting deposits via a flight-to-quality motive when uncertainty rises. This mechanism lowers funding costs and improves banks' net interest margins, and vice versa (Tran and Nguyen, 2023; Valencia, 2017). Along the screening channel, higher bank capital strengthens banks' incentives to safeguard their own funds because they have more at stake (Berger and Bouwman, 2013; Danisman and Tarazi, 2024). As a result, banks may screen and monitor borrowers more effectively, reduce borrower default probabilities, and lower the need for credit-loss provisioning, thereby improving bank performance (Danisman and Tarazi, 2024). Put differently, banks with higher capital tend to adopt more cautious “delay” decisions when GEPU rises, prioritizing safety over immediate expansion. This provides additional support for the Real Options Theory by suggesting that the propensity to delay is more pronounced when banks possess stronger capital buffers.

In addition, our results indicate that bank capital also mitigates the positive impact of GEPU on Vietnamese banks' NPLs. Analogous to its role in attenuating the adverse effect of GEPU on bank performance, bank capital dampens the uncertainty-induced increase in NPLs primarily through the pricing and screening channels. Along the pricing channel, well-capitalized banks can raise funds at a lower cost (Tran and Nguyen, 2023) and therefore face less pressure to tilt their portfolios toward riskier assets in pursuit of higher yields (Miao et al., 2025), which reduces potential NPL accumulation. Along the screening channel, as discussed above, greater capital makes banks more accountable for their own funds (Berger and Bouwman, 2013; Danisman and Tarazi, 2024), thereby weakening incentives to “search for yield” and lowering potential NPL risk. Moreover, better-capitalized banks are likely to have greater resources to implement more rigorous screening, conduct more thorough borrower assessments, and monitor loans more effectively, which reduces default probabilities and, in turn, NPL risk (Danisman and Tarazi, 2024; Mehran and Thakor, 2011).

The study also finds various effects of other factors on the performance and risk of banks in Vietnam. Regarding bank-specific factors, credit growth (GROW_CRE) provides strong evidence of a positive impact on bank performance, whereas interest expenses (INC) are negatively associated with ROA, indicating that banks with lower funding costs operate more efficiently (Durand and Le Quang, 2022). Operating expenses (COST) are found to increase bank performance, consistent with Jawad et al. (2021), but at the same time to raise bank risk, in line with Syahpria et al. (2024). Moreover, bank size (SIZE) suggests that larger banks earn higher profits, supporting the economies-of-scale hypothesis (Ekinci and Poyraz, 2019; Tan et al., 2017), but are also riskier, which is compatible with the “too big to fail” argument (Danisman and Tarazi, 2024). In addition, macroeconomic factors exert different effects on bank profitability and risk: economic growth (GDP) is negatively related to bank risk, whereas inflation (INF) is positively associated with both profitability and risk, similar to the findings of Ekinci and Poyraz (2019).

To ensure the robustness and reliability of the empirical results, we conducted a series of robustness tests on both the dependent and key independent variables. Specifically, for the dependent variables, we used NIM (Net Interest Margin) and standard deviation of ROA (standard deviation of ROA over a 3-year period) as alternative measures of bank performance and risk, respectively, in place of ROA and NPL. The estimation results using NIM and SDROA as dependent variables are presented in models (5) and (6) of Table 5 (see Appendix). The estimated impacts of GEPU, EA, and the interaction term GEPU × EA on bank performance and risk in Table 5 are highly consistent with those in Table 2.

For the independent variable, we replaced the GEPU Index (GEPU) with the US–China Trade Tension Index (UCT). This index was constructed by Rogers et al. (2024) by computing the share of articles discussing US–China tensions, specifically, the proportion of articles containing (1) mentions of the United States (or U.S.) and China (or Chinese), (2) contentious issues in the bilateral relationship, and (3) language indicating tension. We believe this is an appropriate alternative, as escalating trade tensions between the United States and China have been one of the key sources of GEPU in recent years (Zhang et al., 2019). This is especially relevant for a highly open economy like Vietnam, which has strong economic ties with both China and the United States. The regression results using UCT as a substitute for GEPU are reported in Table 6 (see Appendix) (models (7), (8), (9), and (10)) and show similar patterns to the results in Tables 2 and 5.

Furthermore, we replace our baseline proxy for bank capital, EA, with TIER1 (the ratio of Tier 1 capital to total risk-weighted assets) and CAR, and re-estimate the empirical models. The corresponding results are reported in Tables 7 and 8 (see Appendix). These findings are fully consistent with those presented in Tables 2, 5 and 6. In other words, our main empirical results are highly consistent and reliable.

Overall, our findings contribute to the ongoing debate on how EPU shapes banking systems in several respects. First, to our knowledge, this is the first study to examine the effects of GEPU on bank performance and risk in Vietnam, which is an emerging and highly trade-open economy with distinctive trade linkages to both the United States and China. These two major economies have been at the center of recent global economic disruptions. Second, we extend the analysis by investigating the impact of US–China tensions, proxied by the US–China Tension Index, on Vietnamese banks’ performance and risk. This perspective remains underexplored in the literature. We treat the US–China Tension Index as an alternative proxy for GEPU and use it as a robustness check. Our evidence shows that both GEPU and US–China tensions adversely affect Vietnamese banks by weakening performance and increasing credit risk, as reflected in higher NPLs. Third, our study provides the first evidence that bank capital plays a pivotal moderating role in mitigating the detrimental effects of GEPU on Vietnamese banks’ performance and risk. This insight is particularly relevant for Vietnam, where regulators have been promoting banks’ progress toward Basel III standards by encouraging higher capital buffers, yet empirical evidence to support such policies remains limited. Our results help fill this gap. Fourth, we advance the theoretical account of the channels through which policy uncertainty influences bank performance and risk, and clarify the mechanisms through which bank capital conditions these effects. Finally, our study contributes to Real Options Theory by suggesting that the propensity to “delay” decisions becomes more or less pronounced depending on whether banks have higher or lower levels of bank capital.

This study aims to assess the impact of GEPU on the performance and risk of Vietnamese commercial banks, while also examining the moderating role of bank capital in this relationship. Using panel data for 26 Vietnamese banks from 2010 to 2024 and applying both the FGLS and two-step System GMM estimation methods, the study provides strong, consistent, and reliable empirical evidence on the negative effects of GEPU on bank performance and risk in Vietnam. Furthermore, the findings show that banks with higher equity ratios are better able to mitigate the negative impact of GEPU on performance and can also reduce the increase in risk associated with EPU. These results confirm that bank capital is not only a regulatory requirement but also a strategic financial buffer that enhances resilience to external shocks (Bordo et al., 2016; Danisman and Tarazi, 2024; Zhang et al., 2022). Overall, our study contributes to the ongoing debate on the effects of EPU on banking systems in three main ways. (1) We provide pioneering evidence on how GEPU affects bank performance and risk in Vietnam, an emerging economy with high trade openness and distinctive trade linkages with the United States and China, which have been central sources of recent uncertainty shocks. (2) We extend the analysis by incorporating the US–China Tension Index as an alternative proxy for GEPU to conduct robustness checks, thereby offering an additional and still underexplored perspective in the recent literature. (3) More importantly, we provide the first evidence that bank capital serves as a buffer that mitigates the adverse effects of uncertainty on Vietnamese banks' performance and risk. In doing so, our findings strengthen the empirical basis for Vietnam's Basel III-oriented capital strengthening agenda and further clarify the theoretical channels and moderating mechanisms underlying these relationships.

Based on these findings, we propose several key policy implications for bank managers and regulatory authorities. For bank managers, the results highlight the importance of developing dynamic risk management strategies, especially during periods of elevated global uncertainty. Designing contingency risk scenarios and adopting more cautious lending strategies during periods of uncertainty are practical measures to consider (Dang et al., 2025a). Bank managers should regard the maintenance of strong capital buffers not only as a matter of regulatory compliance, but also as a strategic tool to safeguard profitability and stability in the face of external shocks (Zhang et al., 2022).

For policymakers and the State Bank of Vietnam, the findings provide strong empirical support for continuing and strengthening macroprudential regulatory frameworks, particularly capital adequacy requirements. Our study demonstrates that a banking system with higher equity ratios is better equipped to withstand the negative effects of GEPU. Therefore, we fully endorse the efforts of regulatory agencies and the State Bank of Vietnam to implement Basel III standards for Vietnamese commercial banks. This not only enhances the resilience of the banking sector but also aligns Vietnam's financial system with international standards, promoting deeper integration into the global financial markets.

Despite its contributions, this study has some limitations. First, it does not account for the role of economic freedom. The impact of GEPU on the domestic banking system may depend on the degree of openness and liberalization of national policies. However, this dimension is not covered within the scope of this study. Moreover, institutional quality, an important contextual factor in Vietnam, has not been analyzed.

Future research should expand the analysis to explore the moderating effects of economic freedom and institutional quality on the relationship between EPU and bank performance and risk. These extensions will offer a more comprehensive understanding of how structural and policy environments shape banking sector resilience in emerging economies.

We would like to express our sincere gratitude to the editor and anonymous reviewers for their thoughtful comments and constructive feedback. Their insightful suggestions have been invaluable in helping us revise and improve the quality of our manuscript.

The supplementary material for this article can be found online.