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Economic Policy Uncertainty and Bank Liquidity Creation

45 Pages Posted: 6 Sep 2017 Last revised: 10 Nov 2017

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: November 2017

Abstract

We investigate an important channel through which economic policy uncertainty (EPU) affects the economy – bank liquidity creation. Using over one million U.S. bank-quarter observations from 1985:Q2 to 2016:Q4, we find EPU decreases asset-side and off-balance sheet-side bank liquidity creation, but increases liability-side liquidity creation by a lesser amount, yielding reduced total liquidity creation. Thus, EPU likely harms the economy as it hampers banks’ abilities to perform their key function of intermediating liquid funds for productive purposes. Results hold across bank size classes, but are weaker during financial crises, possibly because of favorable government treatment during crises shielding them from uncertainty.

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 (November 2017). Available at SSRN: https://ssrn.com/abstract=3030489

Allen 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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