Bank risk in uncertain times: do credit rationing and revenue diversification matter?

Ashton De Silva, Huu Nhan Duong, My Nguyen, Yen Ngoc Nguyen

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We show that bank risk rises, particularly for larger banks and those with greater interest-sensitive liabilities, during times of economic policy uncertainty through two economic channels: “credit rationing” and “revenue diversification.” The credit rationing channel shows that economic policy uncertainty increases aggregate loan spreads, exacerbating both adverse selection and moral hazard problems leading to higher bank risk. The revenue diversification channel suggests that as economic policy uncertainty reduces bank profits from traditional interest-based products, banks diversify into other non-traditional activities, thereby increasing their instability. Overall, our findings highlight the impact of economic policy uncertainty on exacerbating bank risk.

Original languageEnglish
Pages (from-to)1240-1273
Number of pages34
JournalJournal of Business Finance and Accounting
Volume50
Issue number7-8
DOIs
Publication statusPublished - Jul 2023

Keywords

  • bank risk
  • credit rationing
  • economic policy uncertainty
  • revenue diversification

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