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Central banks’ financial stability orientation and bank risk-taking

Author

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  • Mariana, Christy Dwita
  • Raz, Arisyi F.

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.

Suggested Citation

  • Mariana, Christy Dwita & Raz, Arisyi F., 2025. "Central banks’ financial stability orientation and bank risk-taking," Journal of Financial Stability, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finsta:v:78:y:2025:i:c:s1572308925000385
    DOI: 10.1016/j.jfs.2025.101409
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    Keywords

    Financial stability; Monetary policy; Bank credit risk; Leaning against the wind;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management

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