Economic Policy Uncertainty and Banking Dynamics

Economic policy uncertainty (EPU) refers to the unpredictability surrounding government actions on fiscal, monetary and regulatory measures. Such uncertainty can have a direct bearing on banking dynamics by influencing banks’ risk assessments, lending decisions and capital planning. Elevated EPU typically leads banks to tighten credit supply, increase loan loss provisions and hoard liquidity, thereby slowing credit growth and potentially amplifying the cyclicality of the financial system. Banks with robust capital buffers and diversified business models may better absorb policy shocks, while those with low capitalisation or high opacity are more vulnerable. Risk governance frameworks and transparency measures can mitigate the negative repercussions of uncertainty, supporting financial stability and sustaining credit flows to households and firms. Moreover, regional and institutional factors—such as governance quality, corruption levels and market structure—shape banks’ responses, with divergent outcomes across advanced and emerging economies. Understanding the interplay between EPU and banking dynamics is therefore critical for policymakers seeking to ensure efficient credit allocation, maintain bank resilience and foster sustainable economic growth. Concrete examples include the tightening of loan covenants during periods of regulatory reform anticipation and the expansion of digital lending platforms when traditional credit channels become constrained under policy ambiguity.

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Economic Policy Uncertainty and Banking Dynamics publication trend

The graph below shows the total number of articles in economic policy uncertainty and banking dynamics across all publications each year (not limited to Nature Index journals).

Technical terms

Economic policy uncertainty: A measure of unpredictability regarding government fiscal, monetary and regulatory actions that can affect economic performance.

Non-performing loans: Loans on which borrowers are not making scheduled payments, indicating elevated credit risk.

Loan loss provisions: Funds set aside by banks to cover potential losses from non-performing loans.

Opacity: The lack of transparency in banks’ financial disclosures, which can obscure true performance and risk exposures.

Z-score: A statistical measure used to assess a bank’s insolvency risk by combining return on assets, equity and asset volatility into a single indicator.

References

1. Bank lending in uncertain times. European Economic Review (2020).
2. Economic policy uncertainty, bank nonperforming loans and loan loss provisions: are they correlated?. Asian Journal of Economics and Banking (2022).
3. Economic uncertainty and bank risk: the moderating role of risk governance. Economic Research-Ekonomska Istraživanja (2021).
4. Economic Policy Uncertainty and Bank Stability: An Analysis Based on the Intermediary Effects of Opacity. Sustainability (2023).
5. Uncertainty and bank risk in an emerging market: The moderating role of business models. PLOS ONE (2024).
6. Bank Liquidity Hoarding Strategies in Uncertain Times: New Evidence from an Emerging Market with Bank-level Data. Organizations and Markets in Emerging Economies (2021).
7. Digital Banking through the Uncertain COVID Period: A Panel Data Study. Journal of Risk and Financial Management (2023).