Bank Risk-Taking and Monetary Policy Transmission: Evidence from China
55 Pages Posted: 12 Oct 2020 Last revised: 26 Feb 2021
Date Written: August 23, 2020
We study the impact of China’s 2013 implementation of Basel III on bank risk-taking and its responses to monetary policy shocks using confidential loan-level data from a large Chinese bank. Guided by theory, we use a difference-in-difference identification, exploiting cross-sectional differences in lending behaviors between high-risk and low-risk bank branches before and after the new regulations. We find that, through a risk-weighting channel, changes in regulations significantly reduced bank risktaking, both on average and conditional on monetary policy easing. However, banks reduce risk-taking by increasing lending to ostensibly low-risk state-owned enterprises (SOEs) under government guarantees, despite their low average productivity.
Keywords: Bank risk-taking, banking regulations, risk-weighting, monetary policy, difference-in-difference, China
JEL Classification: E5, G2
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