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

[journal article]

Quagliariello, Mario

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Abstract This paper discusses the role that macroeconomic uncertainty plays in banks' decisions on the optimal asset allocation. Following the portfolio model proposed by Baum et al. (2005), 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 banks' investment decisions, also after controlling for other factors. In periods of increasing turmoil, banks' 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.
Keywords bank
Classification Political Economy; Economic Sectors
Free Keywords business cycle; uncertainty; lending decisions; GARCH
Publication Year 2009
Page/Pages p. 323-336
Journal Applied Economics, 41 (2009) 3
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)