Monetary Policy and Bank Risk-Taking Behaviour in Africa

Central banks in both developed and developing 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.