Economic Policy Uncertainty and Banks’ Loan Pricing

37 Pages Posted: 20 Nov 2019

See all articles by Badar Nadeem Ashraf

Badar Nadeem Ashraf

Jiangxi University of Finance and Economics

Yinjie (Victor) Shen

Cleveland State University

Date Written: July 20, 2019

Abstract

Using news-based government economic policy uncertainty (EPU) index of Baker et al. (2016) and bank-level data from 17 countries over the period 1998-2012, we find that government economic policy uncertainty has significant positive association with interest rates on bank gross loans. Specifically, a one standard deviation increase in EPU leads to 21.84 basis points increase in average interest rates on bank gross loans. We conjecture the economic policy uncertainty boosts banks’ loan prices by increasing the borrowers’ default risk. The impact of EPU on banks’ loan pricing remains persistent after controlling for banks’ own idiosyncratic default risk and the political risk variables from ICRG database. Results remain robust when we use general elections as an alternative proxy of government economic policy uncertainty. We also confirm main results with syndicated loan deals data and observe a significant positive association between loan spreads and EPU index. Together, our results suggest that government economic policy uncertainty is an economically important risk factor for banks’ loan pricing.

Keywords: economic policy uncertainty; EPU; banks’ loan pricing; bank interest rate; political risk

JEL Classification: G20; G21; G28

Suggested Citation

Ashraf, Badar Nadeem and Shen, Yinjie (Victor), Economic Policy Uncertainty and Banks’ Loan Pricing (July 20, 2019). Journal of Financial Stability, Vol. 44, No. 100695, 2019. Available at SSRN: https://ssrn.com/abstract=3484179

Badar Nadeem Ashraf (Contact Author)

Jiangxi University of Finance and Economics ( email )

South Lushan Road
Nanchang, Jiangxi 330013
China

Yinjie (Victor) Shen

Cleveland State University ( email )

Cleveland, OH 44115
United States

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