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Get beyond policy uncertainty: Evidence from political connections

Author

Listed:
  • Hua Cheng

    (Nankai University - School of Finance; University of Texas at Austin)

  • Kishore Gawande

    (University of Texas at Austin)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

  • Shusen Qi

    (Xiamen University - School of Management)

Abstract
Although policy uncertainty has drawn regulators’ attention in the aftermath of the global financial crisis, little is known on how to alleviate its adverse effects. In this paper, we examine the role of political connections in mitigating the detrimental impact of policy uncertainty on banks. Our estimates show that banks are more cautious when facing policy uncertainty, but that the effect is partially alleviated when banks are politically connected. For an increase of one standard deviation in policy uncertainty, connected banks maintain a loss provision to loan volume ratio that is almost seven percent lower compared to their unconnected peers. These findings are robust to a geographical regression discontinuity setting, as well as to a placebo test. Lastly, the mitigating role of political connections is driven mainly by smaller banks and periods of stricter banking regulations.

Suggested Citation

  • Hua Cheng & Kishore Gawande & Steven Ongena & Shusen Qi, 2020. "Get beyond policy uncertainty: Evidence from political connections," Swiss Finance Institute Research Paper Series 20-77, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2077
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3003476
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    References listed on IDEAS

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    More about this item

    Keywords

    Policy uncertainty; Political connections; Bank risk-taking;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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