Economic policy uncertainty, bank nonperforming loans and loan loss provisions : are they correlated?

Purpose - This paper examines the correlation of economic policy uncertainty (EPU) with nonperforming loans and loan loss provisions for 22 major developed countries over the 2008-2017 period. Design/methodology/approach - The study used the Pearson correlation methodology to assess the correlation between EPU, bank nonperforming loans and loan loss provisions. Findings - The findings reveal that EPU is negatively correlated with nonperforming loans and loan loss provisions in the banking sector of EU countries but not for non-EU countries. Also, EPU is negatively correlated with nonperforming loans in the banking sector of the most advanced economies - the G7 countries, while loan loss provisions are more responsive to changes in EPU than NPLs in EU countries. Practical implications - The implication of the findings is that the correlation of EPU with loan loss provisions and nonperforming loans is influenced by regional characteristics. Originality/value - This study is the first to analyze the association of EPU with bank nonperforming loans and loan loss provisions under regional classifications such as the EU, non-EU and the G7 countries. This study provides insights on how regional differences might explain the co-movement of EPU with bank nonperforming loans and loan loss provisions.