Does Economic Policy Uncertainty Affect Bank Profitability?

Managers are concerned about how the macroeconomic environment affects business profit. Focusing on banks, this study investigates the effect of economic policy uncertainty (EPU) on bank profitability in 22 advanced countries. The measures of bank profitability are net interest margin, lending-deposit spread, non-interest income ratio, after-tax return on asset, before-tax return on asset, after-tax return on equity and before-tax return on equity. The findings reveal that high economic policy uncertainty (EPU) negatively affects bank non-interest income. Real GDP growth rate, nonperforming loans and regulatory capital ratio are negatively related to profitability in times of high EPU. The findings also reveal that high EPU has a positive effect on bank profitability in Asia and the region of the Americas as these regions witnessed high return on equity in times of high EPU. The implication of the findings is that, although economic policy uncertainty has a depressive effect on some indicators of bank profitability, regional characteristics can ameliorate the depressive effects of EPU on bank profitability