The effect of economic policy uncertainty on bank valuations

ABSTRACT

This article examines how economic policy uncertainty (EPU) affects bank valuations. Using a large sample of banks over a long period, we find that EPU has a negative effect on bank valuations. One explanation for this result is that EPU reduces bank loan growth, and lower loan growth then leads to lower bank valuations. Consistent with this explanation, we find that the negative effect of EPU is more pronounced for banks with a higher ratio of loans to total assets.

KEYWORDS:

• Policy uncertainty
• bank
• valuation
• loan growth

JEL CLASSIFICATION:

• G21
• E60

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ The data set is available at https://www.newyorkfed.org/research/banking_research/datasets.html