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

Abstract

PurposeThis paper examines the correlation of economic policy uncertainty (EPU) with nonperforming loans and loan loss provisions for 22 major developed countries over the 2008–2017 period.Design/methodology/approachThe study used the Pearson correlation methodology to assess the correlation between EPU, bank nonperforming loans and loan loss provisions.FindingsThe findings reveal that EPU is negatively correlated with nonperforming loans and loan loss provisions in the banking sector of EU countries but not for non-EU countries. Also, EPU is negatively correlated with nonperforming loans in the banking sector of the most advanced economies – the G7 countries, while loan loss provisions are more responsive to changes in EPU than NPLs in EU countries.Practical implicationsThe implication of the findings is that the correlation of EPU with loan loss provisions and nonperforming loans is influenced by regional characteristics.Originality/valueThis study is the first to analyze the association of EPU with bank nonperforming loans and loan loss provisions under regional classifications such as the EU, non-EU and the G7 countries. This study provides insights on how regional differences might explain the co-movement of EPU with bank nonperforming loans and loan loss provisions.