Heterogeneous Effects of Monetary Policy on Bank Risk-Taking Behaviour in Nigeria: A Panel Evidence

The risk-taking channel of monetary policy transmission is an important but understudied area in the Nigerian banking literature, and identifying whether different categories of banks respond differently to monetary policy easing or tightening has significant implications for financial stability policy. This study examines the heterogeneous effects of monetary policy on bank risk-taking behaviour in Nigeria for the period 2007 to 2022, using quarterly bank-level panel data from the financial statements of eighteen commercial banks. Bank risk-taking was measured by non-performing loan ratio, risk-weighted asset density, and loan growth rate. Monetary policy was measured by the monetary policy rate and credit growth impulses. Bank heterogeneity was captured by bank size, capitalisation, and foreign ownership status. The system generalised method of moments estimator with interaction terms was employed. Results demonstrated significant heterogeneity in risk-taking responses to monetary policy: smaller, lower-capitalised banks increased risk-weighted asset density significantly more in response to monetary policy rate reductions (interaction coefficient = -0.048, p < 0.01) than larger, well-capitalised peers. Foreign-owned banks exhibited lower risk-taking sensitivity to monetary policy changes. The results support the existence of a risk-taking channel in Nigerian banking, concentrated in smaller institutions. The study fills an empirical gap in the Nigerian monetary policy-bank risk literature and recommends size-differentiated macroprudential policy instruments that complement monetary policy to contain excessive risk accumulation in smaller banks during easing cycles. Keywords: monetary policy, bank risk-taking, heterogeneous effects, risk-taking channel, Nigerian banks