Does economic freedom matter for risk-taking? Evidence from MENA banks

Abstract

Purpose The relevance of economic freedom in influencing bank risk taking has not been adequately addressed in the literature. In this connection, employing bank-level data for 2000-2012, the purpose of this paper is to examine the impact of economic freedom on risk taking by MENA banks. Design/methodology/approach Given the cross-sectional time-series nature of the data, the author employs panel data techniques to explore this issue. In addition, the author examines the robustness of the results using instrumental variable techniques. Findings The findings appear to suggest that economic freedom exerts a significant and non-negligible impact on bank risk taking. Among the sub-components of economic freedom, it is observed that higher levels of both business and monetary freedom increase variability of profits and, thereby, raise the risk appetite of banks. Risk taking by banks appears to be reliably lower after the crisis than in the period prior to it, although there was a substantial increase in bank risk taking during the crisis. Originality/value To the best of the author’s knowledge, this is one of the earliest studies to explore the interlinkage between economic freedom and bank risk taking for MENA banks.