Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/297989 
Year of Publication: 
2024
Series/Report no.: 
KBA Centre for Research on Financial Markets and Policy Working Paper Series No. 80
Publisher: 
Kenya Bankers Association (KBA), Nairobi
Abstract: 
The study sought to examine the effect interest rate risks on banking sector stability through disentangling the effect of interest rate risk on both fiscal and banking sector stability conditions in Kenya. We applied annual macroeconomic and bank-level data for the period 2001 - 2022 across 37 banks. The study also developed a banking sector stability index to examine evolution of banking sector stability , undertook sensitivity analysis on interest rate sensitive assets k and applied panel fixed effects model to examine the effect of interest rate and fiscal policy risks on banking sector stability . The study found that overall, the banking sector has remained resilient over the study periods, despite experiencing some periods of financial instability. The study also found monetary policy stance has implications on fiscal and banking sector stability whereby contractionary monetary policy raises fiscal and banking sector stability risks when public debt is elevated due to a tight sovereign-bank nexus. Increases in interest rate and credit risks were found to lower banking sector stability while bank capital accumulation strengthened banking sector stability . A high sovereign-bank nexus increases banking sector stability through repricing risks reflected via interest rate and liquidity risks. On other hand banks' portfolio diversification and trading strategies help to mitigate and lower repricing risks from market and interest rate changes. The paper proposes tracking of sovereign-bank nexus overtime to cover multiple business cycles to enhance understanding of sovereign-bank nexus dynamics towards coordinating monetary, fiscal and macroprudential policies.
Subjects: 
Banking sector stability
Fiscal Risks
Monetary policy
Document Type: 
Working Paper

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