2020-27 | July 2021
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Bank Risk-Taking and Monetary Policy Transmission: Evidence from China
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 risk-taking, 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.
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Li, Xiaoming, Zheng Liu, Yuchao Peng, and Zhiwei Xu. 2020. "Bank Risk-Taking and Monetary Policy Transmission: Evidence from China," Federal Reserve Bank of San Francisco Working Paper 2020-27. Available at https://doi.org/10.24148/wp2020-27