Bank Lending Under Policy Uncertainty: Theory and Cross-Country Evidence
45 Pages Posted: 19 Nov 2018
Date Written: October 24, 2018
This paper provides comprehensive theoretical and empirical analyses on bank lending under uncertainty. Our theory differentiates uncertainty from risk and shows that uncertainty-averse banks demand a premium in loan contracting for their exposure to the uncertainty. This premium gets larger as the uncertainty soars. To test our theoretical prediction, we construct a cross-country sample of syndicated loan contracts in 19 major economies over 2000-2015 and proxy the uncertainty with the Economic Policy Uncertainty Index for the same objects and time span. Evidence confirms our theory: We find a positive relationship between loan spreads and the level of uncertainty. The result is collaborated by an IV estimation with the inverse distance weighted EPU as an instrument.
Keywords: Uncertainty, Uncertainty-averse, Loan Pricing, Uncertainty Premium
JEL Classification: G15, G21
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