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Economic policy uncertainty and the supply of business loans

Santiago Barraza and Andrea Civelli ()

Journal of Banking & Finance, 2020, vol. 121, issue C

Abstract: Using a Vector Autoregressive framework of analysis, we show that banks contract their supply of business credit in response to an exogenous increase in economic policy uncertainty. This contraction takes two main, distinct forms. On the one hand, banks restrict their supply of spot funds, which we document using flows of loans and term loan originations. On the other hand, banks also curtail their provision of liquidity insurance, reducing the amount of new credit lines and embedding in them a pricing structure that reduces the probability of borrowers drawing down on the lines. At the peak of the responses, we find that a one-standard-deviation increase in EPU causes a contraction in the supply of business loans between 3 and 5% on the extensive margin.

Keywords: Economic policy uncertainty; Bank lending; Business; Credit (search for similar items in EconPapers)
JEL-codes: D80 E66 G21 G28 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Economic Policy Uncertainty and the Supply of Business Loans (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:121:y:2020:i:c:s0378426620302454

DOI: 10.1016/j.jbankfin.2020.105983

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