Bank Risk-Taking and Monetary Policy Transmission: Evidence from China

55 Pages Posted: 12 Oct 2020 Last revised: 26 Feb 2021

See all articles by Xiaoming Li

Xiaoming Li

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Zheng Liu

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Yuchao Peng

Central University of Finance and Economics (CUFE) - School of Finance

Zhiwei Xu

Peking University HSBC Business School

Date Written: August 23, 2020

Abstract

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

Suggested Citation

Li, Xiaoming and Liu, Zheng and Peng, Yuchao and Xu, Zhiwei, Bank Risk-Taking and Monetary Policy Transmission: Evidence from China (August 23, 2020). Available at SSRN: https://ssrn.com/abstract=3679344 or http://dx.doi.org/10.2139/ssrn.3679344

Xiaoming Li

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Zheng Liu (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Yuchao Peng

Central University of Finance and Economics (CUFE) - School of Finance ( email )

Beijing
China

Zhiwei Xu

Peking University HSBC Business School ( email )

PHBS 612, Unversity Town,
Nanshan District
Shenzhen, Guangdong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
82
Abstract Views
399
rank
368,948
PlumX Metrics