Policy uncertainty and bank lending

The paper investigates a channel through which economic policy uncertainty may harm the real economy through bank lending behavior by using a dataset of US bank holding companies. We document a negative association between EPU and bank lending, meaning that banks are more likely to originate less loans in the time of high EPU. This negative effect is more pronounced with smaller banks. The effect of policy uncertainty on bank lending is actually uniform in sign but grows significantly in magnitude with the increase of quantiles, suggesting that policy uncertainty lowers bank lending in banks at all levels of bank lending. Additionally, the infla-tion risk EPU and the new-based element EPU are likely to have the highest effects on banks' risk-taking behavior, while the tax code expiration has positive impacts. We believe the study provides implications for various managers, investors and policy makers.