The effects of economic policy uncertainty and country governance on banks' liquidity creation: International evidence

Abstract

This study empirically investigates the effects of economic policy uncertainty (EPU) and country governance on bank liquidity creation in various countries. Using the cross-country bank data, we find that EPU harms asset-side liquidity creation and benefits liability-side liquidity creation. The results reveal that uncertainty hinders bank credit, and people tend to make deposits in banks for safety. Moreover, country governance mitigates the negative impact of EPU on bank liquidity creation. Our results are robust in the subsample, two-stage least squares regression, and generalized method of moments analyses. Overall, our findings have crucial policy implications for policy makers and bankers.