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Macroeconomic uncertainty and banks' lending decisions: The case of Italy

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Author Info
Mario Quagliariello () (Banca dÂ’Italia)

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Abstract

This paper discusses the role that macroeconomic uncertainty plays in banksÂ’ decisions on the optimal asset allocation. Using a portfolio model recently proposed in the literature, the paper aims at disentangling how Italian banks choose between loans and risk-free assets when uncertainty on macroeconomic conditions increases. The econometric results confirm that macroeconomic uncertainty is a significant determinant of banksÂ’ investment decisions, also after controlling for other factors. In periods of increasing turmoil, banksÂ’ ability to accurately forecast future returns is hindered and herding behaviour tends to emerge, as witnessed by the reduction of the cross-sectional variance of the share of loans held in portfolio.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td07/td615_07/td615/en_tema_615.pdf
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Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 615.

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Date of creation: Feb 2007
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Handle: RePEc:bdi:wptemi:td_615_07

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Web page: http://www.bancaditalia.it
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Related research
Keywords: bank; business cycle; uncertainty; lending decisions; GARCH;

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Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Calmès & Raymond Théoret, 2009. "The Impact of Banking Deregulation on Canadian Banks Returns," RePAd Working Paper Series UQO-DSA-wp022009, Département des sciences administratives, UQO. [Downloadable!]
  2. Christian Calmès & Raymond Théoret, 2008. "Banking Deregulation and Financial Stability : is it Time to re-regulate in Canada ?," RePAd Working Paper Series UQO-DSA-wp042008, Département des sciences administratives, UQO. [Downloadable!]
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