Banks' Risk Preferences and its Impact on the Loan Supply Function: An Empirical Investigation for The Republic of Macedonia

Abstract

This paper empirically investigates the existence of a bank lending
channel and its determinants in the Republic of Macedonia. According to
the results, there is robust statistical evidence in favour of the existence
of a bank lending channel. As the most influential bank specific
characteristic is the non-performing loans ratio as a proxy variable for
banks' risk preferences. This may indicate that banks' risk preferences
may be the most influential factor in determining their lending activities.
Regarding the rest of the bank specific characteristics, bank liquidity has
an opposite sing from what was expected, while there is no strong
evidence that bank capital may have an influence over the loan supply
function this may be so because the results are sensitive to different
estimation methods and the number of instruments created. Asset size
does not have any significant impact.