How does economic policy uncertainty affect bank business models?

Abstract

Investigating the impact of economic policy uncertainty (EPU) on banks’ business activities using a large sample of U.S. banks during 2000–2017, we find that banks are more likely to diversify their income stream into new activities generating non-interest income amid high EPU. The results indicate that EPU on CPI and bank M&A has no impact on banks’ decisions about non-interest income activities (NIIA) and, notably, small and medium banks increase their NIIA when EPU is elevated, whereas large banks do not. Importantly, EPU related to government spending has the highest impact on banks’ business activities, followed by news-based EPU.