Working papers are academic research by SF Fed economists and affiliates intended for publication in scholarly journals. This section contains working papers on monetary economics and macro-finance topics that have been authored or co-authored by SF Fed Economists.
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Bank Risk-Taking, Credit Allocation, and Monetary Policy Transmission: Evidence from China
Zheng Liu, Xiaoming Li, Yuchao Peng, Zhiwei Xu
Using confidential loan-level data from a large Chinese bank, we examine how Basel III implementation influenced the responses of bank risk-taking to monetary policy shocks. We use a difference-in-differences (DID) approach, exploiting disparities in lending behavior between high- and low-risk bank branches before and after the new regulations. Our findings reveal a novel risk-weighting channel through which monetary policy easing significantly reduced bank risk-taking. However, this risk reduction was achieved by shifting lending towards ostensibly low-risk state-owned enterprises (SOEs) with government guarantees, despite their lower average productivity. Our findings suggest a tradeoff facing China’s monetary policy between curbing bank risks and addressing credit misallocation.