Bank Lending Under Policy Uncertainty: Theory and Cross-Country Evidence

45 Pages Posted: 19 Nov 2018

See all articles by Di Gong

Di Gong

University of International Business and Economics (UIBE) - School of Banking and Finance

Tao Jiang

The People's Bank of China (PBC) - Guangzhou Office

Zhao Li

University of International Business and Economics (UIBE) - School of Banking and Finance

Weixing Wu

University of International Business and Economics (UIBE)

Date Written: October 24, 2018

Abstract

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

Suggested Citation

Gong, Di and Jiang, Tao and Li, Zhao and Wu, Weixing, Bank Lending Under Policy Uncertainty: Theory and Cross-Country Evidence (October 24, 2018). Available at SSRN: https://ssrn.com/abstract=3272065 or http://dx.doi.org/10.2139/ssrn.3272065

Di Gong (Contact Author)

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Tao Jiang

The People's Bank of China (PBC) - Guangzhou Office ( email )

Guangzhou
China

Zhao Li

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street
Chaoyang District
Beijing, 100029
China

Weixing Wu

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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