Economic Policy Uncertainty and Cross-border Lending
35 Pages Posted: 1 Jan 2020 Last revised: 17 Jun 2020
Date Written: April 1, 2020
During times of high economic policy uncertainty, domestic banks increase cross- border syndicated lending. We control for credit demand by including time-varying borrower country fixed effects in our regressions. The credit migration effects are strongest for banks with diverse income, and when banks face fiercer competition, either in the domestic banking sector or from the bond market. Additionally, using elections as a source of plausibly exogenous variation, which positively affects political uncertainty, we provide causal evidence on the effect of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.
Keywords: Syndicated loans; Credit supply; Electoral uncertainty; Option to delay.
JEL Classification: E66; G18; G21; L22
Suggested Citation: Suggested Citation