Bank Performance and Risk-Taking During Monetary Policy Tightening: Evidence from Nepal

Abstract

This study examines the impact of monetary policy tightening on the performance and risk-taking activities of banks in Nepal in the latest form of monetary policy periods based on a study of 2021-2025 quarterly panel data of 20 commercial banks in Nepal with a fixed effect and system generalized method of moments (GMM) analysis. The study has found private banks exhibited more contraction in credits, while public banks experienced worsened asset qualities. Our study clearly found that a large risk-taking channel of the effect of monetary policies prevails in a bank-centered system in Nepal. We observe that while it accomplished its short-run mission of liquidity conditions, it also jacked up costs of accessing credits to vulnerable sectors. We therefore recommend that to mitigate such unwanted spillover impacts of such policies soon, it is important that liquidity facilities and/ or credit guarantees be provided as supplementary policies or that differentiated macro-regulations be applied.