Economic Policy Uncertainty and Bank Valuations

This paper examines the relation between economic policy uncertainty and bank valuation. We use financial data and stock data of U.S bank holding companies over the period of 2002-2015. We use Tobin’s Q as the dependent variable and economic policy uncertainty (EPU) index asindependent variable. We find that the results differ across banks of different size and over different time period. Before and after the financial crisis, a negative relationship is roughly held. However, during the crisis, the results are mixed. Notably, for small banks, the impacts from monetary policy and overall economic policy uncertainty become insignificant. For large and medium banks, the monetary policy uncertainty becomes positively related to bank valuation. And probably because of the cancel-out effect, the overall economic policy uncertainty turns out to be non-negatively associated with bank valuation. We think the results may be explained by “too big to fail” and “constant probability of disaster” theories.