Bank Governance And Bank Behavior In The Transmission Channels Of Monetary Policy

The transmission of monetary policy is the process from the execution of monetary policy to the economic outcomes generated. It is not only the main research target of macroeconomics, but also the core of monetary theory and policy. One of the main researches of monetary policy transmission process is the study of monetary transmission channels which refer to the process that central bank which uses monetary policy tools to influence certain economic variables, and realize its monetary policy objectives.The research of monetary transmission channel put forward three main channels successively:money channel, credit channel and risk taking channel. Traditional monetary channel only concerned bank liabilities (deposits and currency) while ignoring the impact of bank asset (loan) on economic activities. The credit channel argued that monetary policy can change the level of investment by influencing bank loans, thereby affecting the total output. It made up the defect of traditional money channel which built on the assumption of complete information in financial markets, individual and companies of various sources of funds can be easily substituted for one another. It highlighted the presence of friction in financial markets. Asymmetric information made that financial assets do not have complete alternatives (for example, bonds can not completely replace bank loans). Therefore the impact of monetary policy on the economy can be strengthen by changing the credit capacity and conditions of particular borrowers (such as SMEs). After the financial crisis, scholars have further raised the risk taking channel of monetary policy which stresses the influence of monetary policy by affecting bank risk perception and risk tolerance, thereby influencing the bank investment risk positions.The existence of various monetary transmission channels mentioned earlier have been fully validated by domestic and international literatures, while they may function differently in different countries due to the disparity of their macroeconomic environment and financial system. General experience shows that bank characteristics like capital adequacy, liquidity, bank size and business model can make banks react differently when facing the same shock of monetary policy. This paper believes that bank loans and risk taking are results of bank behaviors which is adjusted based on different monetary policy. For banks reacting to external shocks and adjusting their operating behavior differently, bank corporate governance have been proved to be the main reason. Corporate governance as a result of the interaction of proper rights system, market structure, political and cultural background, and legal system has been showed to one of the main factors influencing corporate behavior in the traditional principal agent theory. Board of directors can reduce agency problems by over sighting executives and independent internal control. As the board of directors in bank has the responsibility to audit and approval of the bank’s lending policies, the board of directors and other governance mechanisms may influence the decision of bank board to influence bank lending and investment decisions, and ultimately affect bank performance and risk.This paper examines the role of bank governance in bank lending channel and risk taking channel of monetary policy based on theories of monetary transmission mechanism and bank governance. For measuring bank governance, we use two methods:constructing proxy variables for multiple governance mechanism and using integrated governance index. The empirical results show that:the rise of reserve requirement can reduce bank loan and NPL ratio significantly. The rise of one-year loan interest rate and one-year issuing central bank bills interest rates can lower interbank business risk. In terms of the effect of bank governance on bank lending channel of monetary policy, the result shows that the shareholding ratio of first major shareholder and whether the bank is list can affect bank bank lending, while the same result is not find in board structure. Banks with higher supervision index have less loans and more sensitive to the drop of reserve requirement. In terms of bank risk taking channel, this paper only finds the negative relationship of bank governance index and bank loan risk. The cross term between reserve requirement and bank index is also negative, which indicate that banks with higher governance index are more sensitive to the change of monetary policy. When it comes to interbank business risk, except for board size, bank governance mechanisms have litter effect on it. Banks with higher governance index have higher interbank business risk and less sensitive to the change of monetary policy.The final chapter of this paper also proposed suggestions for how to improving monetary policy transmission system, efficiency and strengthening bank governance and regulatory coordination, preventing bank systemic risk.