The role of happiness in bank risk: An international cross-country analysis

Abstract

In this paper, we investigate whether and how national happiness influences bank risk. Utilizing a comprehensive global sample of commercial banks from 68 countries, spanning the period from 2006 to 2020, we find that positive emotions, particularly happiness, are significantly linked to reduced bank risk. To address potential endogeneity and establish causal relationships, we employ quasi-experimental designs, leveraging external events such as the Beijing Olympics and the Delhi gang rape, along with an instrumental variable approach. Our mechanism analysis identifies political stability and education as key channels through which happiness affects bank risk. This study sheds light on the interaction between emotions and financial institutions, indicating that positive emotion is a crucial determinant of risk in financial markets and institutions.