The implications of economic uncertainty for bank loan portfolios

Abstract

This paper analyses the impact of economic uncertainty on the composition of bank credit across household and firm loans. Using bank-level data spanning 40 developed and developing countries, we find that higher economic uncertainty is associated with an increase in the relative share of household credit in the loan portfolio of banks. This change in composition of credit may result from banks' efforts to reduce the overall riskiness of their loan portfolios, since corporate loans are generally viewed as riskier than household loans. This shift is more pronounced for weakly-capitalized banks, which may face greater risks during economic shocks, and for larger banks, which may be riskier due to complex business models and more market-based activities. The variation in our main findings by banks' capitalization and size suggests that they arise from changes in bank credit supply in response to greater uncertainty. The baseline results hold for a range of robustness tests. Our study highlights the role of aggregate uncertainty in micro-level outcomes and are relevant for bank capital regulation and the conduct of macroprudential policy.