Connected Banks and Economic Policy Uncertainty

41 Pages Posted: 1 Sep 2020 Last revised: 28 Apr 2021

See all articles by Hua Cheng

Hua Cheng

Nankai University - School of Finance; University of Texas at Austin

Kishore Gawande

University of Texas at Austin

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Shusen Qi

Xiamen University - School of Management

Date Written: April 21, 2021

Abstract

In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations.

Keywords: Policy uncertainty; Political connections; Bank risk-taking

JEL Classification: G21; G28; H70

Suggested Citation

Cheng, Hua and Gawande, Kishore and Ongena, Steven R. G. and Qi, Shusen, Connected Banks and Economic Policy Uncertainty (April 21, 2021). Swiss Finance Institute Research Paper No. 20-77, Available at SSRN: https://ssrn.com/abstract=3003476 or http://dx.doi.org/10.2139/ssrn.3003476

Hua Cheng (Contact Author)

Nankai University - School of Finance ( email )

38 Tongyan Road, Jinnan District
Tianjin, Tianjin 300350
China

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Kishore Gawande

University of Texas at Austin ( email )

2317 Speedway
Austin, TX 78712
United States

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Shusen Qi

Xiamen University - School of Management ( email )

No.422 Siming South Road
Xiamen, Fujian 361005
China

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