Abstract
Performance and optimal risk-taking behaviour of the financial sector in a country play a crucial role in the overall health and strength of the market, it is also important for economic growth and financial stability. This study examines whether the degree of economic liberty influences the performance and risk-taking behaviour in banking, using a panel dataset of 130 emerging and developed countries between 2010 to 2021. To achieve a robust outcome from the analysis of our study, we employ Newey-West regression with standard error and GMM econometric techniques, along with baseline panel OLS regression. Our findings suggest that increasing economic liberty enhances banking sector performance while also supporting optimal risk-taking behaviour. However, economic liberty provides more balanced risk-taking behaviour or stability in developed countries than in emerging countries. On the other hand, economic liberty enhances performance in emerging countries relative to developed countries. Our findings have significant implications for finance and economics literature as well as policy practices in the banking sector in a country.
JEL classification E4,F4,G1,G21,G28