This paper investigates whether policy interest rates affect bank risk-taking behavior and banking stability for 14 emerging countries over the period 2000-2014. The empirical findings do not show that lower interest rates increase bank risk taking behavior with presence of risk-taking channel for those emerging countries. Whereas, interest rates do have significant and positive relation with the bank risk-taking behavior because the repayment for borrowers is difficult with higher interest rates. Even though there is no significant relation between interest rates and banking stability, convincing evidence indicates the important roles played by the extent of bank's involvement in non-interest income activities and bank capitalization.
JEL classification numbers: E44, G15, G21
Keywords: Interest rate, Bank risk-taking, Banking stability, Emerging markets