The Risk-Taking Channel and Monetary Transmission Mechanisms in China

Abstract

This study is one of very few studies which have investigated if the risk-taking channels of monetary policy exist in China and which transmission mechanisms are more significant than others. This study uses a new estimation methodology, dynamic panel GMM estimation, to effectively reduce the endogeneity problem. Using data from forty-seven commercial banks in China during the period of 2006-2016, we find that the risk-taking channel of monetary policy exists in China for various monetary policy instruments, such as statuary reserve ratio, prime lending rate and the growth rate of broad money supply. China’s monetary policy influences bank’s risk-taking through the valuation effect, searching for yield effect, and competition effect, but not insurance effect. Monetary authorities in China should encourage moderate competition in the banking industry, while commercial banks in China should improve their risk management and innovate their business to lower the impact of monetary policy on bank’s risk-taking.