Bank risk-taking and monetary policy transmission : Evidence from China

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Title: Bank risk-taking and monetary policy transmission : Evidence from China
Author: Li, Xiaoming ; Liu, Zheng ; Peng, Yuchao ; Xu, Zhiwei
Organization: Bank of Finland
Department / Unit: Bank of Finland Institute for Emerging Economies (BOFIT)
Series: BOFIT Discussion Papers
Series number: 15/2021
Year of publication: 2021
Publication date: 29.10.2021
Pages: 62
Subject (yso): pankit; lainat (rahasumma); luotot; riskit; riski; pääoma; sääntely; rahapolitiikka
Keywords: Bofit-kokoelma; riskinotto; Kiina; Basel III
JEL: E52; G21; G28
Other keywords: bank risk-taking; banking regulations; risk-weighting; monetary policy; difference-in-difference; China
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 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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