Overconfident Bank CEOs: Risk Amplification Amid Economic Policy Uncertainty?

We examine whether overconfident bank CEOs attenuate or amplify risk exposure amid heightened economic policy uncertainty. We find a pronounced risk amplification effect: banks led by overconfident CEOs exhibit significantly higher risk during high-EPU periods, with a one-standard-deviation increase in EPU raising risk exposure by 8%-20% across standard risk measures. This amplification does not operate through credit expansion or weaker provisioning. Instead, we identify a novel portfolio-composition mechanism: overconfident CEOs reallocate lending away from safer, loss-buffering loan categories toward riskier segments during periods of elevated uncertainty, leading to higher realized loan losses and weaker subsequent bank performance.