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Banks’ Risk Preferences and Their Impact on the Loan Supply Function: Empirical Investigation for the Case of the Republic of Macedonia

Authors
Publisher
The Institute of Economics and Ministry of Finance of the Republic of Croatia
Publication Date
Keywords
  • Kreditni Kanal
  • Monetarna Politika
  • Gmm
  • Nenaplativi Krediti
  • Bank Lending Channel
  • Monetary Policy
  • System Gmm
  • Non-Performing Loans

Abstract

This paper empirically investigates the existence of a bank lending channel and its determinants in the Republic of Macedonia. The results suggest that there is robust statistical evidence in favour of the existence of a bank lending channel. The most influential bank-specific characteristic is the non-performing loans (NPL) ratio which might be a proxy for banks’ risk preferences. This would imply that banks’ risk preferences are among the most influential factors in determining banks’ lending activities. However, an alternative interpretation of the NPL ratio suggests that it might serve as an indicator of the ex-post quality of the loan portfolio and, hence, may indicate an increase in banks’ external financing premium. Regarding the rest of the bank-specific characteristics, empirical results show that bank liquidity has the opposite sign from what the theory suggests, while there is no strong evidence that bank capital has impact on the loan supply function as the results are sensitive to different estimation methods and the number of instruments created. Regarding the asset size, the results do not imply any statistically significant impact.

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