Central banks’ financial stability orientation and bank risk-taking

Christy Dwita Mariana and Arisyi F. Raz

Journal of Financial Stability, 2025, vol. 78, issue C

Abstract: The existing literature provides inconclusive theoretical predictions regarding whether central banks’ monetary policy should address financial stability. We therefore empirically evaluate the effect of central banks’ financial stability orientation (“leaning against the wind”) on bank risk-taking. Our baseline results from cross-country, bank-level panel data suggest that higher central banks’ financial stability orientation significantly reduces bank risk-taking. Further investigation shows that monetary policy aimed at achieving financial stability complements macroprudential policy in reducing bank risk-taking, particularly during macroprudential policy tightening. These results offer novel insights into the effect of central bank’s monetary policy on bank stability and provide empirical evidence to prior theoretical works.

Keywords: Financial stability; Monetary policy; Bank credit risk; Leaning against the wind (search for similar items in EconPapers)
JEL-codes: E52 E58 H12 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:78:y:2025:i:c:s1572308925000385

DOI: 10.1016/j.jfs.2025.101409

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