Macroeconomic Uncertainty and Bank Lending: The Case of Ukraine

Abstract:     
This study investigates the link between bank lending behavior and country-level instability. Our dynamic model of bank’s profit maximization predicts a non-monotonic relationship between bank lending and macroeconomic uncertainty. We test this proposition using a panel of Ukrainian banks over the 2003Q2-2008Q2 period. The estimates indicate that banks decrease their lending ratio in times of substantial economic volatility, which could be explained by higher risk aversion of bank managers. Additionally, small and least profitable banks are less likely to be affected by changes in the macroeconomic environment compared to their large and most profitable peers. This outcome is robust with respect to the different measurements of macroeconomic uncertainty.

Keywords: Banks, Macroeconomic uncertainty, Ukraine, Banks’ balance sheets

JEL Classification: G21, G28, P34

Accepted Paper Series