This paper aims to examine the effect of regulatory quality on bank risk-taking, with a particular focus on the moderating role of long-term interest rates.
The study covers 26 European countries over the period from 2005–2021.
The system generalized method of moments and quantile regression approaches indicate that regulatory quality affects bank risk-taking when combined with the influence of long-term interest rates, thereby confirming the moderating role of interest rates.
Data constraints exclude some EU countries, and results may not generalize beyond the 2005–2021 period.
The main contribution of the paper is two-fold. First, it demonstrates the effect of the rule of law on different levels of bank risk-taking regarding the quantile regression. Thus, this paper aids policymakers in managing their restrictions and regulations according to the level of bank risk. Second, it complements the recent literature on this topic by considering the interaction between the rule of law and long-term interest rates, thus broadening the research on the link between monetary and regulatory policy in European countries. Consequently, policymakers should coordinate monetary and regulatory policies, as their interaction critically shapes bank risk. In addition, risk-tiered regulations are recommended, as uniform approaches may be ineffective across diverse banking environments.
