Effect of Monetary Policy and Selected Macroeconomic Variables on Risk Taking Appetite and Performance of Banking Sector of Pakistan.
Keywords:GDP, Consumer Price Index, Monetary Policy, Interbank Offer Rate, Return on Assets.1. Introduction
This study attempts to investigate the impact of monetary policy and macroeconomic together with bank specific variables on bank performance and bank risk taking on their loan portfolios. In this study, reserves and loan loss provision are selected as a proxy to measure bank risk whereas return on assets is selected as a proxy for bank’s performance. The study also include the two bank specific control variables such as bank size and bank capitalization, and macroeconomic variables such as consumer price index and gross domestic product. This study used fixed effect and random effect panel data estimation techniques on dataset of top twenty Pakistanis banks from 2006 to 2020. This study confirms that bank risk taking positively linked with gross domestic product, consumer price index but nothing to do with interbank offer rate. However, the bank size have negative relationship with bank risk, and bank capital have no role in changing bank risk. Whereas, bank performance is positively linked with the interbank offer, gross domestic product and bank specific variables. The consumer price index don’t have any effect on bank performance. Study findings will be helpful for banks management to mitigate associated risks and enhance profitability in a more effective manner. However, for researchers it helps to understand critical areas dealing with banks risk taking appetite and performance.