Recent elections in Brazil and Israel have yielded different political outcomes. In Brazil, Luiz Inácio Lula da Silva’s narrow and ultimately surprise victory in a presidential runoff vote has kept him in office.

In Israel, meanwhile, an inconclusive election result has left uncertainty over the formation of the next government. These outcomes are likely to have an effect on the stability of the financial systems in both countries.

Historically, financial experts believed elections primarily caused brief, nervous jitters in national stock markets. As prior evidence shows, the impact of political uncertainty is often concentrated around the election period, with short-lived spikes in market volatility.

But our 2026 study of 147 national elections across 22 OECD economies between 2000 and 2023 reveals a much deeper, longer-lasting reality.

To understand this, we must first demystify a common banking term: systemic risk. This is the financial equivalent of a domino effect. It is the danger that a shock to one institution or sector could trigger a widespread collapse across the entire financial system.

We saw this in action on a large scale during the 2008 global financial crisis. At that time, the distress of a few highly interconnected institutions threatened to bring down the entire global financial system. Massive government intervention was required to stop the dominoes from falling.

Our findings show that systemic risk follows a broadly hump-shaped trajectory. It dips before scheduled elections, then rises during and after the vote. The risk remains elevated for up to 12 months, particularly when the incumbent government loses office.

Pre-election spending that supports economic activity, alongside possible government suppression of adverse information about economic and financial conditions, offers an explanation for the temporary calm observed before elections.

How elections affect systemic risk

Our study suggests that political continuity can be a financial asset for national banking systems. But Brazil’s recent experience nevertheless shows that continuity does not automatically reassure investors.

Lula reversed a first-round election deficit of more than 2 million votes to secure his reelection. This was the first time since Brazil’s 1985 return to democracy that a president has managed to overturn a first-round defeat.

So the result surprised markets that had positioned for Lula’s challenger, Flávio Bolsonaro, to take office.

On October 26, the day after the runoff vote, Brazil’s benchmark stock index fell 13.9%, while its currency lost 8.1% against the US dollar. There was a modest recovery the following day, with stocks gaining around 1%.

The immediate market reaction does not suggest a banking crisis is underway in Brazil. Whether it develops into broader financial instability depends on how financial institutions and borrowers absorb the shock.

Our study also found that elections that yield no clear winner raise systemic risk, as they leave policy uncertainty over budgets and regulation unresolved. Israel has long struggled to establish durable governing coalitions, and its October 27 election left neither main bloc with a parliamentary majority.

While the US president, Donald Trump, had openly endorsed Israel’s incumbent prime minister, Benjamin Netanyahu, some investors had been positioning for a change of government. The inconclusive result has unsettled markets that had anticipated a clearer political outcome.

During trading on October 28, the day after the election, Israeli stocks fell around 3%. Israel’s currency, the shekel, also weakened by approximately 2% against the US dollar. And the ten-year government bond yield rose nearly five basis points to 4.13%, signalling higher borrowing costs.

Finally, our data shows that snap elections are associated with larger increases in systemic risk. Here, again, Israel is an instructive example. Israel experienced ten elections between 2000 and 2023, seven of which were snap elections. This included five snap elections during its 2018-22 political crisis.

Cushioning the blow

Macroprudential policies, the regulatory guardrails designed to protect the entire banking system, also play a crucial role. By strengthening financial safeguards such as capital buffers for banks, regulators can help the system absorb political shocks.

Unfortunately, evidence suggests that political incentives to stimulate lending before an election can encourage the loosening of these safeguards. This leaves national financial systems more exposed to subsequent shocks.

In Turkey and India, for example, governments have historically used state-owned banks to expand consumer and mortgage credit aggressively before tightly contested elections.

This creates a short-term boost in economic activity and voter goodwill, but often leaves the financial system vulnerable to a hangover of non-performing loans and instability once the votes are counted.

As well as being political events, elections are macroeconomic shockwaves. While the stock market might experience a brief spike in volatility on election night, the true test lies in the systemic risk that lingers in the banking sector for months afterwards.

In Brazil, Lula eventually secured backing from voters for a fourth presidential term. Strengthening financial stability there after this surprise result will require rebuilding market confidence with a credible fiscal plan that explains how campaign promises will be funded and puts public debt on a sustainable path.

In Israel, prospects for a viable government remain uncertain. And even if one emerges, it may offer markets only limited reassurance while the war in the Middle East continues to pose risks to financial stability in Israel and worldwide.