This study explores the effects of banking uncertainty on firms’ debt financing. Employing data from 2007 to 2022 of Vietnam–a bank-based economy, we document that banking uncertainty negatively impacts corporate debt. The impact firmly holds across various debt maturities and sources, with the most predominant driver witnessed in bank debt. We also investigate the potential underlying mechanism linking banking uncertainty to debt financing, thereby validating the working of three crucial channels, including increased costs of debt, substitution of trade credit, and contractions in firm investment. Furthermore, conducting extended analysis, we find that debt financing exhibits more pronounced reactions to banking uncertainty for firms with closer ties to banks or during macroeconomic shocks, as captured by the financial crisis and the COVID-19 pandemic. Our findings survive after robustness checks by alternative measurement, static and dynamic econometric models, and endogeneity controls.

Banking uncertainty and corporate debt: Baseline GMM regression results.

Decomposing corporate debt: Bank debt versus other debts.

Decomposing corporate debt: Long-term versus short-term debt.

Robustness tests: Addressing endogeneity with IV-2SLS regressions.

Robustness tests: A look into the growth rate of corporate debt.