Abstract
Central banks in both developed and develo** economies carry out monetary policy to stabilise their respective economies. However, the literature suggests that monetary policy can result in bank instability through the risk-taking behaviour of banks. While extant studies provide evidence to confirm the risk-taking channel of monetary policy elsewhere, the same cannot be said for Africa, where empirical studies on the subject are sparse. The few studies on Africa have measured monetary policy stance using monetary policy rate. Unfortunately, the monetary policy rate is not comprehensive enough to capture the real monetary conditions of African economies. Using bank-level panel data on 532 banks from 29 African countries for a period of 13 years from 2006 to 2018, this chapter establishes a relationship between monetary policy stance and risk-taking behaviour using a comprehensive measure of monetary policy stance. The results reveal that banks in Africa take on more risk when the monetary policy stance is expansionary. With these findings, central banks need to strengthen their monitoring schemes when accommodative monetary policies become necessary to ensure the stability of banks.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Similar content being viewed by others
References
Aboyadana, G. (2021). Monetary policy and bank risk-taking in Sub-Sahara Africa. The European Journal of Applied Economics, 18(1).
Afonso, G., Santos, J. A., & Traina, J. (2014). Do ‘too-big-to-fail’ banks take on more risk? Economic Policy Review.
Acharya, V., & Naqvi, H. (2012). The seeds of a crisis: A theory of bank liquidity and risk taking over the business cycle. Journal of Financial Economics, 106(2), 349–366.
Almani, A. (2016). Accounting and business magazine of ACCA, October 2016 ed., p. 23.
Altunbas, Y., Gambacorta, L., & Marqués-Ibanez, D. (2009). An empirical assessment of the risk-taking channel. Available at SSRN 1459627.
Altunbas, Y., Gambacorta, L, & Marqués-Ibáñez, D. (2010, March). Does monetary policy affect bank risk-taking? Centre for Economic Policy Research (CEPR). Paper presented at the conference on “Procyclicality and Financial Regulation”.
Alger, G., & Alger, I. (1999). Liquid assets in banks: Theory and practice. Universite des Sciences Sociales.
Baselga-Pascual, L., Trujillo-Ponce, A., & Cardone-Riportella, C. (2015). Factors influencing bank risk in Europe: Evidence from the financial crisis. The North American Journal of Economics and Finance, 34, 138–166.
Borio, C., & Zhu, H. (2008). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism (BIS Working Paper No. 268). Retrieved from Bank or International Settlements website: http://www.bis.org/publ/work268.pdf
Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251.
Bourkhis, K., & Nabi, M. S. (2013). Islamic and conventional banks’ soundness during the 2007–2008 financial crisis. Review of Financial economics, 22(2), 68–77.
Boyd, J. H. & Graham, S. L. (1988). The profitability and risk effects of allowing bank holding. Federal Reserve Bank of Minneapolis. Quarterly Review-Federal Reserve Bank of Minneapolis, 12(2), 3.
Brana, S., Campmas, A., & Lapteacru, I. (2019). (Un) Conventional monetary policy and bank risk-taking: A nonlinear relationship. Economic Modelling, 81, 576–593.
Buch, C. M., Eickmeier, S., & Prieto, E. (2014). In search for yield? Survey-based evidence on bank risk taking. Journal of Economic Dynamics and Control, 43, 12–30.
Chen, M., Wu, J., Jeon, B. N., & Wang, R. (2017). Monetary policy and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 31, 116–140.
Cornett, M. M., McNutt, J. J., Strahan, P. E., & Tehranian, H. (2011). Liquidity risk management and credit supply in the financial crisis. Journal of Financial Economics, 101(2), 297–312.
Delis, M. D., & Kouretas, G. P. (2011). Interest rates and bank risk-taking. Journal of Banking & Finance, 35(4), 840–855.
Delis, M. D., Hasan, I., & Tsionas, E. G. (2014). The risk of financial intermediaries. Journal of Banking and Finance, 44, 1–12.
Dell’Ariccia, G., Laeven, L., & Suarez, G. A. (2017). Bank leverage and monetary policy’s risk‐taking channel: Evidence from the United States. The Journal of Finance, 72(2), 613–654.
Demirgüç-Kunt, A., & Huizinga, H. (2010). Bank activity and funding strategies: The impact on risk and returns. Journal of Financial Economics, 98(3), 626–650.
Demsetz, R. S., & Strahan, P. E. (1997). Size, diversification and risk at bank holding companies (Federal Reserve Bank of New York Research Paper [9506]).
De Nicolò, G., Dell’Ariccia, G., Laeven, L., & Valencia, F. (2010). Monetary policy and bank risk taking (IMF Staff Position Note SPN/10/09).
De Nicolo, M. G., Boyd, J. H., & Jalal, A. M. (2006). Bank risk-taking and competition revisited: New theory and new evidence. International Monetary Fund.
DeYoung, R., & Roland, K. P. (2001). Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. Journal of Financial Intermediation, 10(1), 54–84.
Diamond, D. W., & Rajan, R. G. (2005). Liquidity shortages and banking crises. The Journal of Finance, 60(2), 615–647.
Dong, Y., Firth, M., Hou, W., & Yang, W. (2016). Evaluating the performance of Chinese commercial banks: A comparative analysis of different types of banks. European Journal of Operational Research, 252(1), 280–295.
Festić, M., Kavkler, A., & Repina, S. (2011). The macroeconomic sources of systemic risk in the banking sectors of five new EU member states. Journal of Banking & Finance, 35(2), 310–322.
Fiordelisi, F., Marques-Ibanez, D., & Molyneux, P. (2011). Efficiency and risk in European banking. Journal of Banking & Finance, 35(5), 1315–1326.
Fisher, I. (1933). The debt-deflation theory of great depressions. Econometrica: Journal of the Econometric Society, 1(4), 337–357.
Gambacorta, L. (2009). Monetary policy and the risk-taking channel. International Banking and Financial Market Developments, 3, 43–53.
Greenspan, A. (2005). Risk transfer and financial stability. In Federal Reserve Bank of Chicago Proceedings (No. 968).
Hayek, F. A. (1939). Profits interest and investment and other essays on theory of industrial fluctuations. George Routledge and Sons Limited.
Hodrick, R. J., & Prescott, E. C. (1997). Postwar US business cycles: An empirical investigation. Journal of Money, credit, and Banking, 1–16.
Ioannidou, V., Ongena, S., & Peydró, J. L. (2009). Monetary policy and subprime lending: A tall tale of low federal funds rates, hazardous loans and reduced loan spreads (European Banking Centre Discussion Paper, 45).
Jiménez, G., Ongena, S., Peydró, J. L., & Saurina, J. (2014). Hazardous times for monetary policy: What do twenty-three million bank loans say about the effects of monetary policy on credit risk-taking? Econometrica, 82(2), 463–505.
Kattai, R. (2010). Credit risk model for the Estonian banking sector. Eesti Pank.
Khan, M. S., Scheule, H., & Wu, E. (2017). Funding liquidity and bank risk taking. Journal of Banking & Finance, 82, 203–216.
Kindleberger, C. P. (1991). Bubbles. In The world of economics (pp. 20–22). Palgrave Macmillan.
Klein, N. (2013). Non-performing loans in CESEE: Determinants and impact on macroeconomic performance. International Monetary Fund.
Laeven, M. L., Dell’Ariccia, M. G. & Marquez, M. R. (2010). Monetary policy, leverage, and bank risk taking. International Monetary Fund.
Laeven, M. L., & Valencia, M. F. (2018). Systemic banking crises revisited. International Monetary Fund.
Laeven, L., Ratnovski, L., & Tong, H. (2016). Bank size, capital, and systemic risk: Some international evidence. Journal of Banking & Finance, 69, S25–S34.
Lepetit, L., & Strobel, F. (2013). Bank insolvency risk and time-varying Z-score measures. Journal of International Financial Markets, Institutions and Money, 25, 73–87.
Lepetit, L., & Strobel, F. (2015). Bank insolvency risk and Z-score measures: A refinement. Finance Research Letters, 13, 214–224.
Lepetit, L., Nys, E., Rous, P., & Tarazi, A. (2008). Bank income structure and risk: An empirical analysis of European banks. Journal of Banking & Finance, 32(8), 1452–1467.
Levine, R. (1999). Law, finance, and economic growth. Journal of financial Intermediation, 8(1–2), 8–35.
Maddaloni, A., & Peydró, J. L. (2011). Bank risk-taking, securitization, supervision, and low interest rates: Evidence from the Euro-area and the US lending standards. The Review of Financial Studies, 24(6), 2121–2165.
Nkusu, M. M. (2011). Nonperforming loans and macrofinancial vulnerabilities in advanced economies. International Monetary Fund.
Oima, A., & Ojwang, C. (2013). Market-based and bank-based financial structure on economic growth in some selected Ecowas countries. Journal of Education and Research, 41(2), 34–41.
Rajan, R. (2005). Has financial development made the world riskier? (NBER Working Paper Series No. 11728).
Rose, P. S. (1989). Diversification of the banking firm. Financial Review, 24(2), 251–280.
Roy, A. D. (1952). Safety first and the holding of assets. Econometrica, 20, 431–449.
Soedarmono, W., Machrouh, F., & Tarazi, A. (2011). Bank market power, economic growth and financial stability: Evidence from Asian banks. Journal of Asian Economics, 22(6), 460–470.
Stiroh, K. J. (2004). Diversification in banking: Is non-interest income the answer? Journal of Money, Credit, and Banking, 36, 853–882.
Svensson, L. E., & Woodford, M. (2004). Indicator variables for optimal policy under asymmetric information. Journal of Economic Dynamics and Control, 28(4), 661–690.
Terraza, V. (2015). The effect of bank size on risk ratios: Implications of banks’ performance. Procedia Economics and Finance, 30, 903–909.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2022 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this chapter
Cite this chapter
Gyeke-Dako, A., Harvey, S.K., Azu, G., Issahaku, H. (2022). Monetary Policy and Bank Risk-Taking Behaviour in Africa. In: Abor, J.Y., Adjasi, C.K.D. (eds) The Economics of Banking and Finance in Africa. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-031-04162-4_9
Download citation
DOI: https://doi.org/10.1007/978-3-031-04162-4_9
Published:
Publisher Name: Palgrave Macmillan, Cham
Print ISBN: 978-3-031-04161-7
Online ISBN: 978-3-031-04162-4
eBook Packages: Economics and FinanceEconomics and Finance (R0)