Non-linear nexus between economic policy uncertainty and bank lending

Abstract

Our study examines the non-linear effect of economic policy uncertainty (EPU) on bank lending, using bank-level panel data of 19 countries for the period 2006–2018. We find that EPU reduces bank lending, but this effect varies across banks and market structure and is significantly higher during the financial crisis. Specifically, there is a significant threshold effect of bank competition on EPU and bank lending nexus. Countries with lower competitive environment increase the adverse impact of policy uncertainty. Additional robustness tests exhibit that institutional quality increases bank lending and mitigates negative economic policy uncertainty, while strict bank regulations increase this negative impact. Moreover, the adverse impact of EPU on bank lending is significant in a subgroup of developed countries. Our empirical work has specific policy implications for banks, regulatory bodies, and government agencies for decision-making.