The impact of economic policy uncertainty on banks' non-interest income activities

In this paper, we investigate how banks adjust their business model amid rising global economic uncertainty. Specifically, we analyze the effect of economic policy uncertainty (EPU) on banks' non-interest income activities, using a large panel dataset of 3913 banks operating in 9 countries over the period 2009–2018. We find no statistically significant effect of EPU on banks’ net non-interest income (NNII). Further analysis shows that the lack of effect on NNII is due to a reduction in gross non-interest income which was offset by a reduction in gross non-interest expenses. Our results also suggest that the likelihood of banks to diversify income amid high EPU is conditional on the negative interest rate environment.