Economic Policy Uncertainty and Bank Liquidity Creation

60 Pages Posted: 6 Sep 2017 Last revised: 6 May 2018

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Omrane Guedhami

University of South Carolina - Moore School of Business

Hugh Hoikwang Kim

University of South Carolina, Darla Moore School of Business

Xinming Li

University of South Carolina, Darla Moore School of Business, Department of Finance

Date Written: April 1, 2018

Abstract

Using over one million bank-quarter observations, we identify an important channel through which economic policy uncertainty (EPU) harms the real economy – bank liquidity creation. EPU decreases asset-side and off-balance sheet-side liquidity creation, but increases liability-side liquidity creation by less, yielding reduced total liquidity creation. Reductions stem primarily from decreased liquidity supply, rather than demand, suggesting causal effects on the real economy. This channel may help explain prior findings of unfavorable effects of uncertainty on corporate and household behavior. Stock market analysis reinforces our results. Findings do not hold during financial crises, possibly reflecting favorable government treatment of banks during crises.

Keywords: economic policy uncertainty, bank, liquidity creation, economic growth

JEL Classification: G21, G18, P16

Suggested Citation

Berger, Allen N. and Guedhami, Omrane and Kim, Hugh Hoikwang and Li, Xinming, Economic Policy Uncertainty and Bank Liquidity Creation (April 1, 2018). Available at SSRN: https://ssrn.com/abstract=3030489 or http://dx.doi.org/10.2139/ssrn.3030489

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Hugh Hoikwang Kim (Contact Author)

University of South Carolina, Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States

Xinming Li

University of South Carolina, Darla Moore School of Business, Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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