The Impacts of Excess Liquidity on Bank Risk-Taking : Revisit from Economic Policy Uncertainty Perspective

The study investigates how economic policy uncertainty (EPU) moderates the impact of excess liquidity on risk-taking behaviours of banks and further examines whether the degree of such a moderating factor becomes stronger in the countries which were heavily affected by the 2008 Global Financial Crisis (GFC). By employing SGMM on unbalanced dataset for 33 countries from 2000 to 2019, the study finds that an increase in EPU index attenuates the positive impact of excess liquidity on bank risk-taking. Furthermore, it documents that the attenuating effect of EPU on the relationship between excess liquidity and bank risk-taking is stronger in the countries which were most severely affected by the GFC. It argues that the mechanisms that excess liquidity induces risk-taking are disrupted under high EPU. Our study also extends behavioral theories to shed light on how GFC alters bank risk-taking in the presence of excess liquidity and high economic policy uncertainty