Economic Policy Uncertainty in Banking: A Literature Review

Abstract

This paper is a survey of the most important research in the economic policy uncertainty literature.Economic policy uncertainty, although still under-researched relative to mainstream topics in economics and finance, has recently received increased scholarly attention. Through synthesizing common themes in the literature, the paper highlights the progress made so far and suggest some avenues for future research which allows future researchers to position their research and differentiate themselves from other studies in the literature. The paper finds that economic policy uncertainty affects banks through a reduction in credit supply and loan re-pricing. High economic policy uncertainty compel bank managers to discretionary distort bank financial reporting in ways that help them to mitigate the depressing effect of economic policy uncertainty on their profitability.

Economic policy uncertainty, bank nonperforming loans and loan loss provisions: are they correlated?

“…Many studies have emerged in the EPU banking literature. For instance, Ozili (2021b), in a survey of EPU literature, finds that EPU affects banks through loan repricing and a reduction in credit supply, and banks respond to high EPU by distorting bank financial reporting in ways that help them to mitigate the depressing effect of EPU on their profitability. He and Niu (2018) examine how EPU affects bank valuations using a large sample of banks.…”

Homemade international diversification under economic policy uncertainty

“…Second, we complement the literature on exploring the influence of economic policy uncertainty on financial intermediaries. The literature documents that banks have unique responses to uncertainty, leading to effects on the real economy (Bordo et al, 2016;Nguyen et al, 2020;Ozili, 2021;Tran, 2020). High economic policy uncertainty increases banks' credit risk, to which banks respond by changing interest rates and lending decisions.…”