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Is Economic Uncertainty a Risk Factor in Bank Loan Pricing Decisions? International Evidence

Badar Nadeem Ashraf
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Badar Nadeem Ashraf: School of Finance, Jiangxi University of Finance and Economics, Nanchang 330013, China

Risks, 2021, vol. 9, issue 5, 1-17

Abstract: Uncertainty in economic environment leads economic agents to act cautiously. In this paper, we postulate that such uncertainty leads banks to charge higher interest rate on loans. Measuring aggregate country-level economic uncertainty with the World Uncertainty Index (WUI) and using a bank-level dataset from 88 countries over the period 1998–2017, we find that heightened economic uncertainty increases bank loan interest rates. Specifically, bank loan interest rates rise by 20.67 basis points with a one standard deviation increase in WUI. Our results are robust when we use alternative proxy of uncertainty, include additional controls in the model, and extend the sample size. We also observe that WUI index is better at measuring local economic uncertainty as compared to the Economic Policy Uncertainty (EPU) index. Overall, this study provides evidence that bank price in economic uncertainty is an important risk while setting interest rates on bank loans.

Keywords: bank loan interest rates; economic uncertainty; political uncertainty; world uncertainty index; economic policy uncertainty (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2021
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