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

Author

Listed:
  • Daniel Ofori-Sasu
  • Emmanuel Sarpong-Kumankoma
  • Elikplimi K. Agbloyor
  • Joshua Y. Abor

    (University of Ghana Business School)

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.

Suggested Citation

  • Daniel Ofori-Sasu & Emmanuel Sarpong-Kumankoma & Elikplimi K. Agbloyor & Joshua Y. Abor, 2022. "Risk-taking Behavior, Regulatory Policy and Banking crisis: Evidence from the African Economies," The African Finance Journal, Africagrowth Institute, vol. 24(2), pages 17-37.
    • Handle: RePEc:afj:journl:v:24:y:2022:i:2:p:17-37
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    File URL: https://journals.co.za/doi/abs/10.10520/ejc-finj_v24_n2_a2
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    Cited by:

    1. Daniel Ofori-Sasu & Emmanuel Sarpong-Kumankoma & Saint Kuttu & Elikplimi Komla Agbloyor & Joshua Yindenaba Abor, 2024. "Risk-taking and systemic banking crisis in Africa: do regulatory policy framework provide new insight in threshold models?," Risk Management, Palgrave Macmillan, vol. 26(2), pages 1-37, May.

    More about this item

    Keywords

    Risk-taking; Behaviors; Monetary policy; Macro-and Micro-prudential; Banking crisis;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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