Loan Loss Provisions and Bank Value in the United States: A Moderation Analysis of Economic Policy Uncertainty

Abstract Macroeconomic conditions are often neglected in bank valuation models. We find that economic policy uncertainty significantly reduces bank value by using a panel data regression model with data on the US banks. Economic policy uncertainty also affects bank value through its moderating role in the relationship between loan loss provisions and bank value. The findings remain robust across various endogeneity and robustness tests. This moderating role is particularly significant for small and medium-sized banks, banks with higher levels of non-performing loans, and during the financial crisis period. This study contributes to the understanding of a macroeconomic determinant shaping bank valuation models. The moderation analysis offers new insights into economic policy uncertainty that appears to mitigate the impact of loan loss provisions on bank value by advocating stronger risk governance practices when economic conditions are challenging. Policymakers should address the uncertainties stemming from economic policies to bolster the financial stability of banks.