Threshold effect of bank governance on risk-taking behaviours of banks; the role of regulatory framework in Africa

The study examines the threshold and joint effects of bank governance and regulations in explaining the risk-taking behaviour of banks in Africa. It employs the Three Stage Least Square (3SLS) for banks in 52 African countries over the period 2006–2020. The study found that bank governance has a non-linear (inverted U-shaped) effect on the risk-taking behaviour of banks. This suggests that initial levels of bank governance increase risk-taking but an increase in the levels of bank governance beyond certain threshold leads to a reduction in banks’ risk-taking. It shows that risk-taking is increasing up to a 0.58 threshold of bank governance while beyond this threshold, banks’ appetite for risk-taking declines. The study found that banks' risk-taking is decreased by the regulatory framework (i.e., monetary, macroprudential, and central bank lending policies). It provides evidence that, at higher monetary policy, macroprudential, and central bank lending policy levels, bank governance lowers banks' risk-taking behavior. Thus, better regulatory mechanism improves governance-risk nexus. The implication is that intensity of regulatory scrutiny should complement for bank governance system in achieving an optimal threshold level at which the relation between bank governance and risk-taking in the banking system “bottoms out”. In addition, banks should put forward the design of effective complementarity between governance and regulatory framework and consider the interest of stakeholders in achieving an optimal threshold of the relationship between bank governance and risk-taking behaviour.