How U.S. Bank Stock Prices Respond to Geopolitical Risk

Capitalization does not seem to systematically affect bank stock price responses to geopolitical shocks.⁴ By contrast, profitability matters: A bank at the 90th percentile of return on average assets experiences a 3 basis point smaller decline in stock prices compared with a bank at the 10th percentile, which is consistent with greater profits increasing a bank's ability to distribute capital under adverse circumstances. Banks that have larger liquidity buffers exhibit lower sensitivity to geopolitical risk by the same magnitude. This is consistent with the view that liquidity provides protection during periods of elevated uncertainty and market stress when funding costs may rise.

The non-performing loan ratio shows a negative relationship with GPR betas, providing some evidence that asset quality affects geopolitical risk sensitivity, though the effect is not statistically significant. The results run counter to the hypothesis that trading banks benefit from volatility: A bank at the 90th percentile of the trading assets share experiences a 3 basis point larger decline than one at the 10th percentile, suggesting that the risks associated with holding trading positions during geopolitical turmoil outweigh the potential fee income benefits, at least from the perspective of equity investors.

Internationalization matters, in terms of both the extent to which a bank operates abroad and the geographic locations of its foreign operations. A bank at the 90th percentile of the foreign claims share experiences a 2 basis point larger decline in response to a one-standard-deviation increase in the GPR index compared with a bank at the 10th percentile, although the difference is statistically significant at only the 10 percent significance level.

The effect is slightly more pronounced for BGPR, which captures not just whether a bank is internationally active but where it operates and whether those countries face heightened geopolitical risk: The differential between the 90th and 10th percentiles is 3 basis points. This result echoes findings by Niepmann and Shen (2025), who show that banks reduce lending and tighten credit standards when BGPR increases.⁵ The stock market response documented here suggests that investors anticipate these operational consequences and price them into bank valuations. Relative to the baseline effect of a one-standard-deviation change in the GPR index on bank stock returns of about -10 basis points, a differential effect across banks of as much as 3 basis points appears notable.

Our findings shed light on financial stability risks in an era of elevated and evolving geopolitical tensions. With mounting geopolitical conflict, pressures on banks can build indirectly through weaker economic activity and rising inflation, higher loan losses, and volatility in financial markets as well as through direct exposure to conflict. As economic fragmentation progresses and supply chains realign, banks face differentiated exposures depending on whom they lend to and where they operate. At the same time, their balance sheet vulnerabilities differ. Banks with higher profits and more liquid assets appear better positioned to weather geopolitical risk shocks. The stock market responses for the largest U.S. banks documented here suggest that investors recognize these vulnerabilities and price them into bank valuations, highlighting how geopolitical risk affects financial institutions.