The Impact of Monetary Policy on Bank Risk in the Western Balkan Countries

Abstract The objective of this research paper is to examine the impact of monetary policy conditions on bank risk-taking in the Western Balkan countries. The paper tries to identify if monetary policy conditions, especially money interest rates, may induce a greater appetite for bank risk-taking in the Western Balkan countries. The impact of macroeconomic and banking indicators on bank risk-taking will be examined, too. For this purpose, we apply pooled OLS techniques, Fixed and Random effects panel, and Hausman-Taylor Instrumental IV model. The econometric results show a negative correlation between the monetary policy rate and bank risk-taking, rejecting the hypothesis that monetary policy rates indicate bank risk increase. However, expansive credit policies or loan portfolio growth have a positive impact on bank risk-taking in the Western Balkans. The study is original, and its findings will be of value to Central Banks and other policymakers in the Western Balkan countries.