Connected banks and economic policy uncertainty

Hua Cheng, Kishore Gawande, Steven Ongena and Shusen Qi

Journal of Financial Stability, 2021, vol. 56, issue C

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 (search for similar items in EconPapers)
JEL-codes: G21 G28 H70 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:56:y:2021:i:c:s1572308921000796

DOI: 10.1016/j.jfs.2021.100920

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