Macroeconomic uncertainty and banks' lending decisions: The case of Italy

This paper discusses the role that macroeconomic uncertainty plays in banks� decisions on the optimal asset allocation. Using a portfolio model recently proposed in the literature, the paper aims at disentangling how Italian banks choose between loans and risk-free assets when uncertainty on macroeconomic conditions increases. The econometric results confirm that macroeconomic uncertainty is a significant determinant of banks� investment decisions, also after controlling for other factors. In periods of increasing turmoil, banks� ability to accurately forecast future returns is hindered and herding behaviour tends to emerge, as witnessed by the reduction of the cross-sectional variance of the share of loans held in portfolio.