Bank liquidity hoarding and bank systemic risk: The moderating effect of economic policy uncertainty

Abstract

In this article, we use panel data from 457 listed banks in 20 countries to investigate the impact of bank liquidity hoarding on systemic risk in the banking sector and discuss it under the condition of economic policy uncertainty (EPU). Empirical evidence suggests that when banks' liquidity hoarding increases, their systemic risk contribution decreases significantly. Furthermore, we demonstrate that bank liquidity hoarding works through the channel of improving bank operational stability and reducing bank asset risk. In addition, during a period of high EPU, bank liquidity hoarding has a more significant effect on reducing systemic risk. Our results remain stable after a battery of robustness checks. Heterogeneity analysis indicates that the role of bank liquidity hoarding in reducing systemic risk is more significant in larger banks and banks in developed countries. Moreover, this effect is particularly pronounced when there is an accommodative monetary policy environment. Our study has some important implications for policymakers and regulators. Previous research suggests that policymakers may consider encouraging the banking sector to actively create liquidity instead of hoarding it, as this could lead to higher economic output. However, from the perspective of financial stability, banks' liquidity hoarding can help reduce their systemic risk contribution, especially in periods of high external uncertainty. Therefore, policymakers need to evaluate bank liquidity hoarding behaviour more comprehensively, and strike a balance between promoting economic growth and ensuring financial system stability to maximize overall welfare.