Risk-taking Behavior, Regulatory Policy and Banking crisis: Evidence from the African Economies

Daniel Ofori-Sasu, Emmanuel Sarpong-Kumankoma, Elikplimi K. Agbloyor and Joshua Y. Abor ()
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Joshua Y. Abor: University of Ghana Business School

The African Finance Journal, 2022, vol. 24, issue 2, 17-37

Abstract: The study examines the effect of regulatory policies on the complex relationship between the risk-taking behaviors of banks and the predicted probability of a banking crisis. By employing the dynamic instrumental variable (IV) probit estimation for a panel dataset of 52 African countries over the period, 2006-2020, the study found that banking crisis is persistent for some periods but it dissipates thereafter. It found that banking crisis is likely to occur when banks’ risk-taking behavior exceeds a certain threshold point. The study provides evidence to support that monetary policy, macro-prudential policy action and micro-prudential policies (i.e., regulatory capital and capital buffer) are effective and important frameworks for reducing the positive impact of above average risk-taking behavior of banks on the predicted probability of a banking crisis. Therefore, policies that combine the measures of regulations, as well as a common resolution mechanism that makes the banking system more robust can help reverse the positive impact of above risk-taking behavior on the likelihood of a banking crisis.

Keywords: Risk-taking; Behaviors; Monetary policy; Macro-and Micro-prudential; Banking crisis (search for similar items in EconPapers)
JEL-codes: E3 E5 E61 G2 G3 G32 L10 L51 M21 M48 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:afj:journl:v:24:y:2022:i:2:p:17-37

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