Economic Policy Uncertainty, Bank Capital Adequacy, and Bank Profitability

Abstract

This chapter examines the impact of economic policy uncertainty (EPU) on bank profitability, using a sample of US banks from 2001 to 2016. We find a robust negative relationship between the aggregate level of policy uncertainty and bank profitability. The channel analysis shows that policy uncertainty can significantly reduce loan growth and increase the nonperforming loan ratio. More importantly, we find critical evidence that bank capital can improve the impact of policy uncertainty on the bank's economic performance and operation. Overall, this chapter has an important policy implication: policymakers can reduce the adverse effect of policy uncertainty on the banking industry through measures to stabilize bank capital adequacy.

Citation

Mendy, L.L., Yang, S.-Y. and Shi, W.-Z. (2023), "Economic Policy Uncertainty, Bank Capital Adequacy, and Bank Profitability", Lee, C.-F. and Yu, M.-T. (Ed.) Advances in Pacific Basin Business, Economics and Finance (Advances in Pacific Basin Business, Economics and Finance, Vol. 11), Emerald Publishing Limited, Leeds, pp. 127-143. https://doi.org/10.1108/S2514-465020230000011006