The effect of macroprudential policies on bank risk in the west African economic and monetary union

Abstract

This paper examines the effect of macroprudential policies (MaPs) on individual bank risk-taking in the West African Economic and Monetary Union (WAEMU) using a panel of 92 banks across seven countries over the period 2005–2021. Using a fixed-effects estimator with lagged and contemporaneous regressors, complemented by a system-GMM estimator as a robustness check, we find that macroprudential tightening significantly reduces individual bank risk. The effect is driven primarily by credit-cycle instruments, which exert a substantially larger stabilizing impact than resilience-oriented tools. MaP effects are also asymmetric: tightening episodes reduce bank risk significantly, while loosening episodes have no measurable impact. Finally, the stabilizing effect of MaPs operates primarily through pan-African banks. These findings carry important policy implications for the design of macroprudential frameworks in monetary unions of low-income countries dominated by African foreign banks.