Divergent Effects of Economic Policy Uncertainty on European Banks Profitability: Role of Capital Adequacy Ratio
DOI:
https://doi.org/10.22555/pbr.v27i1.1367Keywords:
EPU, quantile regression, banks profitability, capital adequacyAbstract
This study aims to shed light on how economic policy uncertainty (EPU) affects the profitability of European banks across various banking groups and how capital adequacy ratio (CAR) moderates this relationship. Quantile regression analysis is used to analyze the relationship for 3941 yearly observations for the period from 2010 to 2020 for banks in 12 European countries. The findings indicate that the impact of EPU on profitability differs significantly depending on the kind of bank. For instance, while Investment and Saving Banks remain unaffected or even profit from greater EPU, Bank Holdings, Commercial Banks, Real Estate and Mortgage Banks, and Islamic Banks all see a decline in profitability due to EPU. CAR moderates the negative relationship between EPU and bank profitability, but the impact is asymmetrical among different types of banks. Overall, the paper's findings emphasize how crucial bank-specific traits like institutional framework, business focus, and risk attitude determine how banks respond to shifts in EPU. The diverse impacts of EPU on bank profit by category show that there is no one-size-fits-all approach to policy intervention in the banking industry.
References
Ab Rahman, S., Ahmad, N. H., & Che Arshad, N. (2021). Bank specific and macroeconomic factors influencing Islamic banks deposits. International Journal of Islamic Business (IJIB), 6(2), 37-57. https://doi.org/10.32890/ijib2021.6.2.4
Adelopo, I., Vichou, N., & Cheung, K. Y. (2022). Capital, liquidity, and profitability in European banks. Journal of Corporate Accounting & Finance, 33(1), 23-35. https://doi.org/10.1002/jcaf.22522
Adewole, J. A., Dare, F. D., & Ogunyemi, J. K. (2019). Implications of financial intermediation on the performance of commercial banks in Nigeria: 2000-2017. Financial markets, institutions and risks, 3(4). http://doi.org/10.21272/fmir.3(4).94-105.2019
Agbeja, O., Adelakun, O., & Olufemi, F. (2015a). Capital adequacy ratio and bank profitability in Nigeria: A linear approach. International Journal of Novel Research in Marketing Management and Economics, 2(3), 91-99. www.noveltyjournals.com
Agbeja, O., Adelakun, O. J., & Olufemi, F. (2015b). Capital adequacy ratio and bank profitability in Nigeria: A linear approach. International Journal of Novel Research in Marketing Management and Economics, 2(3), 91-99.
Aiyar, S., Calomiris, C. W., & Wieladek, T. (2015). Bank capital regulation: Theory, empirics, and policy. IMF Economic Review, 63(4), 955-983. https://doi.org/10.1057/imfer.2015.18
Akinci, O., & Olmstead-Rumsey, J. (2018). How effective are macroprudential policies? An empirical investigation. Journal of financial intermediation, 33, 33-57. https://doi.org/10.1016/j.jfi.2017.04.001
Al-Sharkas, A. A., & Al-Sharkas, T. A. (2022). The impact on bank profitability: Testing for capital adequacy ratio, cost-income ratio and non-performing loans in emerging markets. Journal of Governance and Regulation, 11(1). https://doi.org/10.22495/jgrv11i1siart4
Al-Thaqeb, S. A., & Algharabali, B. G. (2019). Economic policy uncertainty: A literature review. The Journal of Economic Asymmetries, 20, e00133. https://doi.org/10.1016/j.jeca.2019.e00133
Alessandri, P., & Bottero, M. (2020). Bank lending in uncertain times. European Economic Review, 128, 103503. https://doi.org/10.1016/j.euroecorev.2020.103503
Allahrakha, M., Cetina, J., & Munyan, B. (2018). Do higher capital standards always reduce bank risk? The impact of the Basel leverage ratio on the US triparty repo market. Journal of financial intermediation, 34, 3-16. https://doi.org/10.1016/j.jfi.2018.01.008
Allen, F., & Santomero, A. M. (1997). The theory of financial intermediation. Journal of Banking & Finance, 21(11-12), 1461-1485. https://doi.org/10.1016/S0378-4266(97)00032-0
Altig, D., Baker, S., Barrero, J. M., Bloom, N., Bunn, P., Chen, S., Davis, S. J., Leather, J., Meyer, B., & Mihaylov, E. (2020). Economic uncertainty before and during the COVID-19 pandemic. Journal of Public Economics, 191, 104274. https://doi.org/10.1016/j.jpubeco.2020.104274
Amadeo, K. (2018). Causes of the 2008 global financial crisis. The Balance, 25.
Ampudia, M., & Van den Heuvel, S. J. (2022). Monetary policy and bank equity values in a time of low and negative interest rates. Journal of Monetary Economics, 130, 49-67. https://doi.org/10.1016/j.jmoneco.2022.05.006
Ashraf, B. N., Qian, N., & Shen, Y. V. (2021). The impact of trade and financial openness on bank loan pricing: Evidence from emerging economies. Emerging Markets Review, 47, 100793. https://doi.org/10.1016/j.ememar.2021.100793
Ashraf, B. N., & Shen, Y. (2019). Economic policy uncertainty and banks’ loan pricing. Journal of Financial Stability, 44, 100695. https://doi.org/10.1016/j.jfs.2019.100695
Athari, S. A. (2021). Domestic political risk, global economic policy uncertainty, and banks’ profitability: evidence from Ukrainian banks. Post-Communist Economies, 33(4), 458-483. https://doi.org/10.1080/14631377.2020.1745563
Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The quarterly journal of economics, 131(4), 1593-1636. https://doi.org/10.1093/qje/qjw024
Barrero, J. M., & Bloom, N. (2020). Economic uncertainty and the recovery. Jackson Hole Economic Policy Symposium Paper, August.
Berger, A. N., Guedhami, O., Kim, H. H., & Li, X. (2020). Economic policy uncertainty and bank liquidity hoarding. Journal of financial intermediation, 100893.
Bernanke, B. S. (1983). Irreversibility, uncertainty, and cyclical investment. The Quarterly Journal of Economics, 98(1), 85-106. https://doi.org/10.2307/1885568
Black, B., De Carvalho, A. G., Khanna, V., Kim, W., & Yurtoglu, B. (2017). Corporate governance indices and construct validity. Corporate Governance: An International Review, 25(6), 397-410. https://doi.org/10.1111/corg.12215
Bordo, M. D., Duca, J. V., & Koch, C. (2016). Economic policy uncertainty and the credit channel: Aggregate and bank level US evidence over several decades. Journal of Financial Stability, 26, 90-106. https://doi.org/10.1016/j.jfs.2016.07.002
Boungou, W., & Mawusi, C. (2021). Bank lending margins in a negative interest rate environment. International Journal of Finance & Economics. https://doi.org/10.1002/ijfe.2455
Brastama, R. F., & Yadnya, I. P. (2020). The effect of capital adequacy ratio and non performing loan on banking stock prices with profitability as intervening variable. American Journal of Humanities and Social Sciences Research (AJHSSR), 4(12), 43-49. www.ajhssr.com
Caglayan, M., & Xu, B. (2019). Economic policy uncertainty effects on credit and stability of financial institutions. Bulletin of Economic Research, 71(3), 342-347. https://doi.org/10.1111/boer.12175
Chan, S. (2021). Financial repression and financial risk: the case of China. Post-Communist Economies, 33(1), 119-132. https://doi.org/10.1080/14631377.2020.1833554
Chernozhukov, V., Fernández-Val, I., & Kowalski, A. E. (2015). Quantile regression with censoring and endogeneity. Journal of Econometrics, 186(1), 201-221. https://doi.org/10.1016/j.jeconom.2014.06.017
Chi, Q., & Li, W. (2017). Economic policy uncertainty, credit risks and banks’ lending decisions: Evidence from Chinese commercial banks. China journal of accounting research, 10(1), 33-50. https://doi.org/10.1016/j.cjar.2016.12.001
Dang, A. (2025). The The Impact of Financial Development on Environmental Pollution in Asian Countries: Examining the Role of Corruption Control. International Journal of Energy Economics and Policy, 15(2), 330.
Dang, B. K., Vo, D. T., & Ha, N. T. M. (2025). The impact of economic uncertainty and institutional quality on bank profitability: global evidence. International Economics and Economic Policy, 22(3), 1-29. https://doi.org/10.1007/s10368-025-00664-w
Danisman, G. O., & Tarazi, A. (2024). Economic policy uncertainty and bank stability: Size, capital, and liquidity matter. The Quarterly Review of Economics and Finance, 93, 102-118. https://doi.org/10.1016/j.qref.2023.11.008
Dao, B. T. T., & Nguyen, K. A. (2020). Bank capital adequacy ratio and bank performance in Vietnam: A simultaneous equations framework. The Journal of Asian Finance, Economics and Business, 7(6), 39-46.
Desalegn, T. A., Zhu, H., & Borojo, D. G. (2023). Economic policy uncertainty, bank competition and financial stability. Journal of Financial Economic Policy, 15(2), 123-139.
Fatima, N. (2014). Capital adequacy: A financial soundness indicator for banks. Global Journal of Finance and Management, 6(8), 771-776. ISSN 0975-6477
Gorton, G., & Winton, A. (2003). Financial intermediation. In Handbook of the Economics of Finance 1, 431-552. Elsevier. https://doi.org/10.1016/S1574-0102(03)01012-4
Grassi, L., Lanfranchi, D., Faes, A., & Renga, F. M. (2022). Do we still need financial intermediation? The case of decentralized finance–DeFi. Qualitative Research in Accounting & Management, 19(3), 323-347. https://doi.org/10.1016/j.jfineco.2019.03.006
Grosse-Rueschkamp, B., Steffen, S., & Streitz, D. (2019). A capital structure channel of monetary policy. Journal of Financial Economics, 133(2), 357-378. https://doi.org/10.1016/j.jfineco.2019.03.006
Gulen, H., & Ion, M. (2016). Policy uncertainty and corporate investment. The Review of Financial Studies, 29(3), 523-564. https://doi.org/10.1093/rfs/hhv050
Gürçay, H. R., & Akbal?k, M. (2025). An Examination of the Relationship between banking Sector Profitability and Economic Policy Uncertainty using Panel Data Analysis. Uluslararas? Finansal Ekonomi ve Bankac?l?k Uygulamalar? Dergisi, 6(1), 44-74. https://doi.org/10.57085/ufebud.1623618
HA, D. V. (2019). The interactive relationship between credit growth and operational selfsustainability of People’s Credit Funds in Mekong Delta Region of Vietnam. The Journal of Asian Finance, Economics and Business, 6(3), 55-65. https://doi. org/10.13106/jafeb.2019.vol6.no3.55
Hadjixenophontos, A., & Christodoulou-Volos, C. (2018). Financial crisis and capital adequacy ratio: A case study for Cypriot commercial banks. Journal of Applied Finance and Banking, 8(3), 87-109. ISSN: 1792-6580 (print version), 1792-6599 (online)
Hamdi, K., & Hassen, G. (2022). Economic policy uncertainty effect on credit risk, lending decisions and banking performance: evidence from Tunisian listed banks. Journal of Economic and Administrative Sciences, 38(2), 287-303. https://doi.org/10.1108/JEAS-09-2020-0159
Harahap, I. M. (2018). Impact of bank performance on profitability. Scholars Journal of Economics, Business and Management, 5(8), 727-733. https://doi.org/10.36347/sjebm.2025.v12i06.001
Irawati, N., Maksum, A., Sadalia, I., & Muda, I. (2019). Financial performance of Indonesian’s banking industry: The role of good corporate governance, capital adequacy ratio, non-performing loan and size. International Journal of Scientific and Technology Research, 8(4), 22-26. https://doi.org/10.36347/sjebm.2025.v12i06.001
Karadima, M., & Louri, H. (2021). Economic policy uncertainty and non-performing loans: The moderating role of bank concentration. Finance Research Letters, 38, 101458. https://doi.org/10.1016/j.frl.2020.101458
Killins, R. N., Johnk, D. W., & Egly, P. V. (2019). The impact of financial regulation policy uncertainty on bank profits and risk. Studies in Economics and Finance, 37(4), 725-752. https://doi.org/10.1108/SEF-05-2019-0169
Konstantakopoulou, I. (2023). Financial intermediation, economic growth, and business cycles. Journal of Risk and Financial Management, 16(12), 514. https://doi.org/10.3390/jrfm16120514
Krishnan, V. (2010). Constructing an area-based socioeconomic index: A principal components analysis approach. Edmonton, Alberta: Early Child Development Mapping Project. https://doi.org/10.3390/jrfm16120514
Kusumastuti, W. I., & Alam, A. (2019). Analysis of Impact of CAR, BOPO, NPF on Profitability of Islamic Banks. Journal of Islamic Economic Laws, 2(1), 30-59. http:// dx.doi.org/10.21511/bbs.19(4).2024.19
López-Penabad, M. C., Iglesias-Casal, A., & Neto, J. F. S. (2022). Effects of a negative interest rate policy in bank profitability and risk taking: Evidence from European banks. Research in international business and finance, 60, 101597. https://doi.org/10.1016/j.ribaf.2021.101597
Lotto, J. (2018). The empirical analysis of the impact of bank capital regulations on operating efficiency. International Journal of Financial Studies, 6(2), 34. https://doi.org/10.3390/ijfs6020034
Madugu, A. H., Ibrahim, M., & Amoah, J. O. (2020). Differential effects of credit risk and capital adequacy ratio on profitability of the domestic banking sector in Ghana. Transnational Corporations Review, 12(1), 37-52. https://doi.org/10.1080/19186444.2019.1704582
Mendy, L. L., Yang, S.-Y., & Shi, W.-Z. (2023). Economic policy uncertainty, Bank Capital adequacy, and Bank profitability. In Advances in Pacific Basin Business, Economics and Finance 11, 127-143. Emerald Publishing Limited. https://doi.org/10.1108/S2514-465020230000011006
Mohammad, K. U. (2022). How bank capital structure decision-making change in recessions: Covid-19 evidence from Pakistan. Asian Journal of Economics and Banking, 6(2), 255-269. DOI 10.1108/AJEB-04-2021-0049
Molnár, J. (2018). What does financial intermediation theory tell us about fintechs? Vezetéstudomány-Budapest Management Review, 49(5), 38-46. https://doi.org/10.14267/VEZTUD.2018.05.04
Molyneux, P., Reghezza, A., & Xie, R. (2019). Bank margins and profits in a world of negative rates. Journal of Banking & Finance, 107, 105613. https://doi.org/10.1016/j.jbankfin.2019.105613
Nguyen, T. C. (2021). Economic policy uncertainty and bank stability: Does bank regulation and supervision matter in major European economies? Journal of International Financial Markets, Institutions and Money, 74, 101387. https://doi.org/10.1016/j.intfin.2021.101387
Ozili, P. K. (2022). Economic policy uncertainty, bank nonperforming loans and loan loss provisions: are they correlated? Asian Journal of Economics and Banking, 6(2), 221-235. DOI 10.1108/AJEB-10-2021-0119
Pástor, ?., & Veronesi, P. (2013). Political uncertainty and risk premia. Journal of Financial Economics, 110(3), 520-545. https://doi.org/10.1016/j.jfineco.2013.08.007
Pines, M. (2018). Banking and Financial Intermediaries: Overlapping Evolving Monetary Functions and Investment Fallouts. Economics, 6(4), 263-278. doi: 10.17265/2328- 7144/2018.04.002
Primpas, I., Tsirtsis, G., Karydis, M., & Kokkoris, G. D. (2010). Principal component analysis: Development of a multivariate index for assessing eutrophication according to the European water framework directive. Ecological Indicators, 10(2), 178-183. https://doi.org/10.1016/j.ecolind.2009.04.007
Rampini, A. A., & Viswanathan, S. (2018). Financing insurance.
Romelli, D. (2022). The political economy of reforms in Central Bank design: evidence from a new dataset. Economic Policy, 37(112), 641-688. https://doi.org/10.1093/epolic/eiac011
Ruggah, H. H., Ibrahim, U. S., Haruna, H. A., Abba, B., shehu Isa, F., & Yusuf, A. (2024). Effect of capital adequacy on the financial performance of Nigerian deposit money banks. FULafia International Journal of Business and Allied Studies, 2(3), 197-211. DOI:10.5281/zenodo.7774547
Saha, S., Sen, K. K., & Bishwas, P. C. (2024). Nexus between Economic Policy Uncertainty and Bank Liquidity Creation: Moderating Role of Bank Regulations and Credit Risk. Finance & Economics Review, 6(1), 45-60. https://doi.org/10.38157/fer.v6i1.621
Schwert, M. (2018). Bank capital and lending relationships. The Journal of Finance, 73(2), 787-830. https://doi.org/10.1111/jofi.12604
Si, D.-K., Wan, S., Li, X.-L., & Kong, D. (2022). Economic policy uncertainty and shadow banking: firm-level evidence from China. Research in International Business and Finance, 63, 101802. https://doi.org/10.1016/j.ribaf.2022.101802
Silaban, P. (2017). The effect of capital adequacy ratio, net interest margin and non-performing loans on bank profitability: The Case of Indonesia.
Sitompul, S., & Nasution, S. K. (2019a). The effect of CAR, BOPO, NPF, and FDR on profitability of sharia commercial banks in Indonesia. Budapest International Research and Critics Institute (BIRCI-Journal): Humanities and Social Sciences, 2(3), 234-238. DOI : https://doi.org/10.33258/birci.v2i3.41
Sitompul, S., & Nasution, S. K. (2019b). The Effect of Car, BOPO, NPF, and FDR on Profitability of Sharia Commercial Banks in Indonesia. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), 2, 234-238. DOI : https://doi.org/10.33258/birci.v2i3.412
Sousa, V. M. S. (2023). Uncertainty in the banking sector and its impact on bank profitability Universidade dos Acores (Portugal)].
Sum, V. (2012). Economic policy uncertainty and stock market performance: evidence from the European Union, Croatia, Norway, Russia, Switzerland, Turkey and Ukraine. Journal of Money, Investment and Banking, 25, 99-104.
Taherdoost, H., Sahibuddin, S., & Jalaliyoon, N. (2022). Exploratory factor analysis; concepts and theory. Advances in applied and pure mathematics, 27, 375-382.
Tran, D. V., Hoang, K., & Nguyen, C. (2021). How does economic policy uncertainty affect bank business models? Finance Research Letters, 39, 101639. https://doi.org/10.1016/j.frl.2020.101639
Van’t Klooster, J., & Fontan, C. (2020). The myth of market neutrality: A comparative study of the European Central Bank’s and the Swiss National Bank’s corporate security purchases. New political economy, 25(6), 865-879. https://doi.org/10.1080/13563467.2019.1657077
Vyas, S., & Kumaranayake, L. (2006). Constructing socio-economic status indices: how to use principal components analysis. Health policy and planning, 21(6), 459-468. https://doi.org/10.1093/heapol/czl029
Wang, C.-W., Lee, C.-C., & Chen, M.-C. (2022). The effects of economic policy uncertainty and country governance on banks' liquidity creation: International evidence. Pacific-Basin Finance Journal, 71, 101708. https://doi.org/10.1016/j.pacfin.2022.101708
Wen, J., Khalid, S., Mahmood, H., & Yang, X. (2022). Economic policy uncertainty and growth nexus in Pakistan: A new evidence using NARDL model. Economic Change and Restructuring, 1-15. https://doi.org/10.1007/s10644-021-09364-2
Wüthrich, K. (2020). A comparison of two quantile models with endogeneity. Journal of Business & Economic Statistics, 38(2), 443-456. https://doi.org/10.1080/07350015.2018.1514307
Additional Files
Published
Issue
Section
License
Copyright (c) 2025 Ahmed Shahzad, Ammar Abid
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
