Policy uncertainty and loan loss provisions in the banking industry

Ng, Jeffrey; Saffar, Walid; Zhang, Janus Jian

doi:10.1007/s11142-019-09530-y

Cited by 100 publications

(56 citation statements)

References 101 publications

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“…Economic policy uncertainty is uncertainty derived from the unknown impact of new economic policies on the private sector and the economy. EPU can also derive from whether existing economic policies will change in the near future (Baker et al 2016;Ng et al 2020;Danisman et al, 2020). Policy uncertainty may arise from multiple sources: inflation uncertainty, negative economic growth, financial crisis, abnormal lending cuts, rising unemployment rate, foreign exchange volatility, and unexpected changes in monetary policy rate (Ball, 1992;Istiak and Alam, 2019;Zhang et al, 2019;Chen et al, 2020).…”

Section: The Economic Policy Uncertainty (Epu) Conceptmentioning

confidence: 99%

“…In the private sector, high EPU make firms delay investment which affects the level of cash-flow and output (Wang et al, 2014;Kang et al, 2014). In the banking sector, high EPU give bank managers incentives to reprice their loan portfolio and increase interest rate on loans (Ng et al, 2020;Danisman et al, 2020). High EPU can also affect countries through trade tariff spillovers.…”

Section: The Economic Policy Uncertainty (Epu) Conceptmentioning

confidence: 99%

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Economic Policy Uncertainty: Are There Regional and Country Correlation?

Ozili¹

2021

SSRN Journal

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This study examines the correlation of economic policy uncertainty (EPU) across countries and regions. Using correlation analysis, the findings reveal that some countries have a positive EPU correlation while other countries have a negative EPU correlation. The economic policy uncertainty index is positively correlated and jointly significant for EU member-countries. There is evidence of cross-regional positive correlation. Also, the EPU correlations are significant for Europe, non-EU countries and the region of the Americas during the global financial crisis, which suggest that financial crises are a contributory factor that drives the correlation of economic policy uncertainty in certain regions.

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Section: The Economic Policy Uncertainty (Epu) Conceptmentioning

confidence: 99%

Section: The Economic Policy Uncertainty (Epu) Conceptmentioning

confidence: 99%

Economic Policy Uncertainty: Are There Regional and Country Correlation?

Ozili¹

2021

SSRN Journal

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“…Ng et al . () examine the effect of political uncertainty on banks regarding how banks accrue for loan losses. They document that economic policy uncertainty is positively associated with the recognition of loan loss provisions for the sample period between 1996 and 2016.…”

Section: Political Uncertainty and Financial Intermediariesmentioning

confidence: 99%

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance. most likely to occur if the old policy has led to unexpected low realized profitability. Therefore, policy change can increase firms' expected profitability, thereby pushing stock prices up, that is, the cash flow effect. However, due to the new policy's higher uncertainty, policy change can also increase discount rates, thereby pushing stock prices down, that is, the discount rate effect. The authors show analytically that, on average, the discount rate effect will outweigh the cash flow effect and stock prices will fall at the announcement of a government policy change. The reason is that positive announcement returns tend to be small as policy changes that have the potential to push stock prices up are mostly expected by investors. Moreover, as new policies introduce more uncertainty and raise the volatility of the stochastic discount factor, government policy changes will increase stock return volatilities and correlations.Closely related to P astor and Veronesi (2012, 2013) analyze the risk premium induced by political uncertainty. P astor and Veronesi (2013) extend the general equilibrium model developed by P astor and Veronesi (2012) in two key aspects. First, unlike P astor and Veronesi (2012) who assume political cost is unknown to investors, P astor and Veronesi (2013) allow investors to learn about the political costs of the new policies through the stream of political news. Second, P astor and Veronesi (2012) assume that all government policies are identical a priori, whereas P astor and Veronesi (2013) allow the government to choose from a set of heterogeneous policies. The impacts of both, the learning about political costs and policy heterogeneity, are larger in weak economic conditions when a policy change is more likely to happen.Accordingly, in P astor and Veronesi's (2013) analytic model, stock returns are driven by capital shocks, impact shocks, and political shocks, and correspondingly the equity risk premium can be decomposed into three components based on the three types of shocks. As the optimal choice for the government is to change its policy when the old policy is perceived as sufficiently unfavorable, the authors show analytically that the composition of the risk premium varies depending on the economic state. In weak economic conditions when the probability of a policy change is high, the equity risk premium is largely driven by the political risk premium. However, in strong economic conditions when a policy change ...

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“…Economic policy uncertainty is defined as uncertainty regarding economic policies such monetary policy, fiscal policy and regulatory policies, and it derives mainly from whether existing policies will change in the future (Baker et al 2016;Danisman et al, 2021). Economic policy uncertainty describes the unknown impact of new policies on the economy and the private sector (Ng et al 2020), while policy uncertainty is defined as uncertainty about government policies. Economic policy uncertainty is a hot topic in the finance literature, even though 'policy uncertainty' is not a new topic.…”

Section: Introductionmentioning

confidence: 99%

Economic Policy Uncertainty in Banking: A Literature Review

Ozili¹

2021

SSRN Journal

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This paper is a survey of the most important research in the economic policy uncertainty literature.Economic policy uncertainty, although still under-researched relative to mainstream topics in economics and finance, has recently received increased scholarly attention. Through synthesizing common themes in the literature, the paper highlights the progress made so far and suggest some avenues for future research which allows future researchers to position their research and differentiate themselves from other studies in the literature. The paper finds that economic policy uncertainty affects banks through a reduction in credit supply and loan re-pricing. High economic policy uncertainty compel bank managers to discretionary distort bank financial reporting in ways that help them to mitigate the depressing effect of economic policy uncertainty on their profitability.

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Policy uncertainty and loan loss provisions in the banking industry

Cited by 100 publications

References 101 publications

Economic Policy Uncertainty: Are There Regional and Country Correlation?

Economic Policy Uncertainty: Are There Regional and Country Correlation?

Political Uncertainty and Finance: A Survey

Economic Policy Uncertainty in Banking: A Literature Review

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