Policy Uncertainty and Bank Liquidity Hoarding: International Evidence

Abstract

Uncertainty about government economic policies (GEPU) leads economic agents to act cautiously. In this paper, we postulate that such GEPU leads banks to hoard higher amount of liquid assets as a precautionary motive. Using bank-level data from 21 countries over the period 1998-2018, we find that GEPU positively affects bank liquid assets holdings. While examining the channels, results of interaction-terms provide evidence that banks reduce lending and attract higher deposits to build up liquid assets in response to heightened GEPU. We further confirm precautionary motive by finding that the positive association between GEPU and bank liquid assets strengthens for banks with higher expected loan losses.