Economic policy uncertainty and bank stability: Size, Capital, and Liquidity Matter

40 Pages Posted: 7 Jun 2021 Last revised: 3 Oct 2022

See all articles by Gamze Ozturk Danisman

Gamze Ozturk Danisman

Kadir Has University

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE); University of Limoges - Faculty of Law and Economic Science; Economic Research Forum (ERF)

Date Written: September 30, 2022

Abstract

We examine the impact of economic policy uncertainty on bank stability post-2007-2008 global financial crisis and how bank size, capital, and liquidity influence this relationship. We rely on the economic policy uncertainty (EPU) index introduced by Baker et al. (2016). We use 176,477 quarterly observations for US commercial banks over the period from 2011Q1 to 2020Q3 and find consistent and robust evidence that bank stability decreases as the level of economic policy uncertainty increases. We specifically control for demand-side effects, which indicates that the decrease in bank stability not only originates from borrowers’ and customers’ conditions but also from a change in bank behavior. We show that bank size, capital, and liquidity matter, i.e., the negative impact of policy uncertainty on bank stability is stronger for larger banks and weaker for highly capitalized banks as well as for more liquid banks. Our findings support the Basel III initiatives aimed at raising capital levels with tighter rules for the larger banks and the implementation of the newly introduced liquidity rules.

Keywords: Economic Policy Uncertainty, Bank Stability, Bank Risk, COVID-19

JEL Classification: G18, G21, G28

Suggested Citation

Danisman, Gamze Ozturk and Tarazi, Amine, Economic policy uncertainty and bank stability: Size, Capital, and Liquidity Matter (September 30, 2022). Available at SSRN: https://ssrn.com/abstract=3855469 or http://dx.doi.org/10.2139/ssrn.3855469

Gamze Ozturk Danisman (Contact Author)

Kadir Has University ( email )

Istanbul
Turkey

Amine Tarazi

University of Limoges - Laboratoire d'Analyse et de Prospectives Économiques (LAPE) ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Economic Research Forum (ERF) ( email )

21 Al-Sad Al-Aaly St.
(P.O. Box: 12311)
Dokki, Cairo
Egypt

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