Economic policy uncertainty and cross-border lending

During times of high economic policy uncertainty, domestic banks increase cross-border syndicated lending, after controlling for credit demand at the borrower country or country-industry levels, and also, bilateral relationships between banks and borrower countries. The credit migration effects are strongest for banks with diverse income, and when banks face fiercer competition, either in the domestic banking sector or from the bond market. Additionally, using elections as a source of plausibly exogenous variation, which positively affects political uncertainty, we provide causal evidence on the effect of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.