Economic policy uncertainty leads to subdued lending

As lending is a medium- to long-term commitment, banks can restrain
from lending to non-financial corporations or to households during episodes of
elevated EPU. To shed some light on EPU spillovers, table 7 presents the
average moving correlation of the monthly EPU index and of bank loan flows to
non-financial corporations from 2008 to Q3-2017. We repeat this exercise for
the largest euro area countries separately to address cross country
heterogeneity.13 EPU and corporate loan flows correlate negatively, i.e.
Increased uncertainty probably lowers bank lending flows.

The average correlation coefficient is moderate with 22% in France. It is 30% in Italy and 44%
in Spain which indicates that the negative externality from EPU to bank lending
is especially high in southern euro area countries.