Spillover effects of U.S. Equity market volatility on banking stability in developing economies: a fixed effects model and system GMM approach

Using a panel dataset for 40 developing economies, this paper investigates the effects of US stock market volatility on bank stability in developing countries for the period of 2000–2023 with the fixed effects model and the two-step System Generalized Method of Moments. In the analysis, banking stability was measured by the Z-score and the non-performing loan (NPL) ratio. The findings reveal that volatility in the US stock market has a significant and negative impact on bank stability in developing countries. This effect remains consistent both in methodological robustness tests and in analysis with alternative stability indicators. The results obtained show that measures for policymakers, such as strengthening capital adequacy regulations, improving liquidity management, and diversifying financial markets to reduce dependence on external capital, will play a critical role in increasing bank stability.