Title: The impact of uncertainty on banks

Authors: Bert Smoluk

Addresses: University of Southern Maine, 96 Falmouth Street, Portland, ME 04104, USA

Abstract: As liquidity providers, banks are essential in ensuring the flow of funds to the economy, especially during periods of uncertainty. Their effectiveness in this role depends on their resilience to economic shocks and their ability to remain financially viable. This paper explores the impact that uncertainty shocks have on the financial condition of banks using VAR methodology. Our findings reveal that banks respond to uncertainty shocks by widening spreads to offset elevated lending risks and bolstering liquidity through increased holdings of securities. However, after an initial surge in loan growth, lending plateaus as equity declines, making it more difficult for banks to extend credit due to risk-based capital requirements. Productivity, an indicator of a bank's long-term health, along with its underlying drivers - investment and employment - tends to decline following an uncertainty shock. By analysing shifts in loan spreads, we find evidence suggesting that banks continue to pursue a relationship lending strategy, even amid heightened uncertainty.

Keywords: uncertainty shocks; banks; VIX; monetary policy uncertainty; financial regulatory uncertainty; financial intermediation.

DOI: 10.1504/IJBAAF.2025.151898

International Journal of Banking, Accounting and Finance, 2025 Vol.15 No.4, pp.421 - 443

Received: 14 Aug 2024
Accepted: 01 Dec 2025
Published online: 25 Feb 2026 *

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