Certain uncertainty? The response of Venezuelan banks to a political dilemma

Armijos, Mary; Cuberta, Guillem

Certain uncertainty? The response of Venezuelan banks to a political dilemma

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Armijos, M, Cuberta, G. Certain uncertainty? The response of Venezuelan banks to a political dilemma. 2019. handle: http://hdl.handle.net/10230/43378

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Abstract

This paper studies how policy uncertainty and political connection has affected Venezuelan banks’ performance and lending activities. We use monthly microdata from the Venezuela’s Superintendence of Banks and we construct two indices to exploit its variation. We find that in period of high economic policy uncertainty politically connected banks are willing to assimilate taking more risks and thus they give out more loans. Complementarily, the amount of provisions held for potential loses is also higher for connected banks during high uncertainty periods. Nevertheless, we find that having a political connection, during times of high uncertainty, damages the profitability compared to non-politically connected banks. Our study provides new insights for the scarce literature on this field, especially on the measure of the variables of interest. It also highlights relevant information for Venezuelan economy. It's noteworthy to mention that although political connection benefits some banks, it's not possible to achieve a full competitive advantage over non-politically connected banks. This might be due to the current state of the country's economy and financial markets.