Essay On Bank Lending Channel,Risk- Taking Channel And Risk-competition Nexus

This thesis explores three major areas of financial intermediation, namely, bank lending channel, risk-taking channel and risk-competition nexus. The first two areas(bank lending channel and risk-taking channel) explore the role of monetary policy in Chinese banking sector. Whereas, risk-competition nexus investigates the relationship between bank risk and competition. Furthermore, the thesis also investigates the role of various factors that affect bank lending channel and risk-taking channel of monetary policy transmission. The data used in this thesis comprises of the annual unbalanced panel from 2000 to 2013. Dynamic panel model system and difference GMM are applied.The results of this thesis suggest that bank lending channel neither operates through balance sheet characteristics nor through bank risk. However, this thesis provides significant evidence of lending channel operates through the market structure. The market structure undermines the effect of monetary policy on bank lending. The results have important policy implications for Chinese banking system. As suggested by results, higher market power weakens the transmission of monetary policy and hence bank lending channel. Monetary policy individually may not work until the market structure is considered. Although higher competition raises concerns about financial stability, however, in this case, higher market power has a detrimental effect on bank lending channel and monetary policy transmission. Such results may argue pro-competitive policy in Chinese banking market so that desired objective of monetary policy can be achieved. Empirical findings of this thesis also suggest that low monetary policy rates increase bank risk. Unlike previous studies,results of this thesis suggest that bank-specific factor (size, liquidity, and capitalization) does not play a significant role in the risk-taking channel. However,market structure has stabilizing effect bank risk-taking channel. Higher market power weakens risk-taking channel of monetary policy transmission. From a policy point of view, lower monetary policy induces banks to take excessive risk. However,such effect can be mitigated by encouraging a proper level of market power in the banking market. Furthermore, findings of this thesis suggest that response of bank risk (measured with different proxies) is different using different measures of market structure. The study support competition stability, competition fragility hypothesis along with U-shaped relationship conditional to various measures of bank risk and market structure. It is normally argued that higher market power increase credit risk, however, bank overall risk may not increase if the bank uses more capital and risk mitigating techniques to reduce overall bank risk. I have tested such argument by exploring the relationship between bank capitalization ratio and market structure. Empirical finding this thesis does not support such argument.Risk-competition is a complex issue. It would be too quick to jump to conclusion on basis of single measure of bank risk and market structure. This study strongly argues that multiple measures of bank risk and market structure should be used to explore risk-competition with robustness.