Beyond Geopolitical Shocks: How Institutional Quality and Ownership Structure Heterogeneity Shape Nonlinear Banking Resilience in MENA

Abstract Geopolitical tensions have become an increasingly important source of uncertainty affecting financial resilience, particularly in regions characterized by persistent political instability and institutional heterogeneity. We develop a comprehensive framework by exploring the nonlinear effect of geopolitical tensions and examining how institutional quality and ownership structure condition banks’ resilience to geopolitical shocks across 112 banks across MENA countries during 2007–2024 using dynamic system GMM estimations. Our findings show that geopolitical tensions exhibit a nonlinear relationship with financial resilience. Initial increases in geopolitical tensions significantly reduce resilience by increasing uncertainty, market instability, and default risk; however, at higher levels of geopolitical exposure, banks gradually adapt through stronger risk management and resilience-building strategies. Institutional quality significantly moderates the geopolitical tensions–financial resilience nexus. Stronger regulatory quality, government effectiveness, corruption control, rule of law, voice and accountability, and political stability mitigate the adverse consequences of geopolitical shocks. Ownership structure plays an important governance role, with state ownership, foreign ownership, domestic private ownership, and ownership concentration enhancing banks’ ability to absorb geopolitical disruptions. Difference in differences confirm the causal negative impact of geopolitical instability on financial resilience. Furthermore, propensity score matching, and entropy balancing approaches demonstrate that the findings remain robust after addressing potential selection bias. This paper contributes to geopolitical risk and financial resilience literature by showing that the consequences of geopolitical tensions depend not only on shock intensity but also on institutional capacity and ownership governance mechanisms. The findings provide important implications for policymakers and bank managers seeking to strengthen financial resilience in geopolitically vulnerable economies.