۱- Introduction

۲- Literature and hypotheses

۳- Research design

۴- Empirical results

۵- Additional analyses

۶- Conclusion and implications

References

Abstract

Using data for Chinese commercial banks from 2000 to 2014, this paper examines the effects of economic policy uncertainty (EPU) on banks’ credit risks and lending decisions. The results reveal significantly positive connections among EPU and non-performing loan ratios, loan concentrations and the normal loan migration rate. This indicates that EPU increases banks’ credit risks and negatively influences loan size, especially for joint-equity banks. Given the increasing credit risks generated by EPU, banks can improve operational performance by reducing loan sizes. Further research indicates that the effects of EPU on banks’ credit risks and lending decisions are moderated by the marketization level, with financial depth moderating the effect on banks’ credit risks and strengthening it on lending decisions.

Introduction

As an emerging and transforming economic power, China’s government plays an important role in business activities. To realize the goal of social governance, governments use economic policies (e.g., fiscal, monetary, industrial and administrative) to adjust and control the economic operation and behavioral patterns of market participants. Following the 2008 financial crisis, the Chinese government proposed and implemented a set of intensive policies to stimulate the economy and alleviate the pressure generated by the economic downturn. These policies efficiently addressed the economic decline, but they also objectively aroused tremendous economic policy uncertainty (hereinafter referred to as EPU). Fan and Xu (2015) survey 1041 CEOs in domestic and foreign enterprises operating in China, and find that 57% and 66% of CEOs in domestic and foreign enterprises, respectively, explicitly treat the condition that laws and regulations are ambiguous, changeful and selectively executed as their biggest concern. Facing a high level of EPU in China, market participants must dynamically rectify their operational strategies and actions. As important participants in the Chinese market, commercial banks possess the same essential attributes as general corporations, but one of their special functions is channeling the effects of governmental macroeconomic control. Specifically, given advancing marketization, commercial banks are becoming more similar to general enterprises, exhibiting more market-orientated behavioral modes and operating goals. Governments also intensively adjust deposit rates and reserve requirement ratios to indirectly achieve economic regulation and control. This suggests that commercial banks are a key loop in the transmission mechanism of official macroeconomic policies. The operating businesses of commercial banks are at enormous risk and inherently possess great influence. Given these characteristics, we assume that the effects of EPU on commercial banks are particularly complex. Therefore, there is an urgent need to investigate whether EPU affects commercial banks. In particular, it is important to uncover the mechanism by which EPU operates, and the solutions for mitigating its effect on commercial banks. To answer these issues, we pursue an understanding of commercial banks’ behavioral patterns in dealing with the shock generated by EPU within emerging economies.