The effects of economic uncertainty and economic policy uncertainty on banks’ loan loss provision in Brazil

Gabriel Caldas Montes and Matheus do Nascimento Valladares

Journal of Economics and Business, 2024, vol. 131, issue C, No S0148619524000274

Abstract: This paper investigates the effects of economic uncertainty and economic policy uncertainty on banks’ loan loss provision in Brazil, and it seeks to identify which uncertainties have the greatest impact on loan loss provisions. Regarding uncertainties, it is possible to proxy economic uncertainty and economic policy uncertainty through disagreements among professional forecasters and through news-based proxies. Thus, as a novelty, disagreements among professional forecasters are used to proxy both economic and economic policy uncertainties, and for checking robustness, news-based proxies are employed. The disagreements in expectations are divided into two groups: the first focuses on uncertainties related to economic policy instruments (i.e., monetary policy interest rate and primary surplus), and the second on uncertainties related to economic outcomes (i.e., inflation, exchange rate, GDP growth, and public debt). Regarding the news-based proxies of economic policy uncertainty and economic uncertainty, two indicators were employed: the first is the Economic Policy Uncertainty index, and the second is the index of economic uncertainty unrelated to economic policy that we calculate. Based on dynamic panel data analysis for 125 Brazilian banks, the findings suggest uncertainties in economic outcomes have greater influence on banking provisions than uncertainties in economic policy. The study validates the results using news-based indexes and a subsample representing the post-global financial crisis period.

Keywords: Credit risk; Provisions; Disagreement in expectations; Economic uncertainty; Economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: D80 D84 E44 G21 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:131:y:2024:i:c:s0148619524000274

DOI: 10.1016/j.jeconbus.2024.106185

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