Ownership, interest rates and bank risk-taking in Central and Eastern European countries

We examine the impact of interest rates on bank risk-taking in 10 CEE economies and the Russian Federation for the 1997-2011 period taking explicitly into account the ownership status of banks, i.e., domestic vs. foreign owned. The results show that the risk-taking behavior differs between foreign and domestic banks. Foreign banks increased their risk-taking appetite as long run interest rates declined during the 2000s in all countries, while they behaved more aggressively in the 10 CEE countries, responding to the decline of the short term rates as well. This behavior stemmed mainly from higher capitalized banks. In turn, the risk-taking nexus is absent for domestic banks in the 10 CEE economies. Moreover, the solvency status of foreign banks remained essentially unaffected by monetary conditions in all countries while this does not hold for domestic banks in the Russian Federation.