Policy uncertainty,the use of derivatives: Evidence from U.S. bank holdingcompanies (BHCs)

We explore the link between bank holding companies’ hedging in derivatives and economic policy uncertainty using a newspaper-based index of policy uncertainty. Interestingly, we find that bank holding companies use derivatives less intensively in states where policy uncertainty is high (they hedge against homogenous (tradable) risk only); instead, they allocate their risk exposure via lending (thus increasing their credit risk). This finding is robust to different combinations of data samples, including the usage of only fourth quarter data, annual data, excluding bank mergers and acquisitions, and the results are robust to sample selection.