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

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.