Systemic financial risk increases during election years

New research from the University of St Andrews Business School has shown that national elections are linked to changes in financial system stability. 

Using data from banks across 22 advanced economies such as the United States, the United Kingdom, Japan, Germany, France, and Canada between 2000 and 2023, and covering 147 elections, researchers found that systemic financial risk tends to increase during election years and in the period immediately after elections. 

On average, systemic risk is about 3.7% higher in election years compared to normal periods. In contrast, risk is generally lower just before regularly scheduled end-of-term elections. The study highlights cases such as the 2016 US election, where an unexpected outcome increased market volatility, reduced liquidity and raised systemic risk in the post-election period.

The results, published in the Journal of Banking and Finance suggest that governments may suppress negative information and pursue expansionary fiscal policies ahead of elections, contributing to higher risk later. The effect is particularly strong during snap elections and when incumbent governments are voted out of office. 

The research further shows that well‑designed macroprudential policies (policies aimed at protecting the stability of the financial system as a whole) together with sustained economic growth and higher levels of public confidence in government and banking institutions, can play a significant role in mitigating risk.

In practice, this can involve regulators increasing capital buffers or tightening lending standards in the run-up to periods of heightened risk. The study finds that in years where such macroprudential policies are tightened, systemic risk decreases and the destabilising impact of elections is significantly weakened.

With many global national elections scheduled to take place in 2026, including Japan. Denmark, Sweden, New Zealand and Brazil, these results provide insights which may be consequential to national financial institutions, incoming governments, and their citizens.

Co-author from the University of St Andrews Business School Dr George Kladakis, said: “Our findings show that elections are not just political events but they have real consequences for financial stability. While risk often appears lower in the run-up to elections, it tends to rise afterwards, particularly when there is political change or uncertainty. This matters for both governments and the public, as higher systemic risk can translate into financial instability, tighter credit conditions, and broader economic uncertainty. Strengthening regulatory frameworks and maintaining trust in institutions are key to mitigating these effects.”

ENDS