The Impact Of China's Monetary Policy On Bank Liquidity

In 2008,during the international financial crisis,the Wenchuan earthquake,snow disaster,and other major natural disasters in China in the same year,China's liquidity at different levels dried up rapidly.China's decision-makers put forward the "four trillion" investment plan in time,and quickly alleviated the phenomenon of liquidity depletion by actively increasing leverage.However,as time goes on,the "side effects" of leverage are gradually emerging,liquidity flooding,rising prices,overcapacity,and high asset prices are occur frequently,which has aroused great concern at home and abroad about the rapid expansion of China's economic debt scale and the substantial increase of financial leverage.In December 2015,the Party Central Committee and the State Council put forward a decision to deploy "Three Deletions,One Reduction,and One Subsidy." In July 2017,at the Fifth National Financial Work Conference,they put forward a clear timetable and task for "risk prevention and deleveraging." All these indicate that the financial instability resulting from the excessive liquidity caused by leverage has become more evident,and it is urgent for the central bank to control and resolve the liquidity and its risks through monetary policy.With the initial results of a series of deleveraging policies from 2015 to 2018,the overall domestic liquidity began to decline,and the macro-control gradually entered the stage of stabilizing leverage.Novel coronavirus pneumonia spread in China and abroad at the beginning of2020,and China and the world economy faced significant challenges.The United States and many countries launched an unlimited monetary policy of quantitative easing and zero interest rates.On February 2,2020,the people's Bank of China also announced ahead of schedule the measures to increase the counter cyclical adjustment of monetary policy,stabilize market expectations,and provide liquidity for the financial market and the real economy.With a large amount of liquidity investment,China's financial leverage will increase significantly again by the end of2020,which is close to the highest point in history.Financial leverage will fluctuate greatly,and financial risks will accumulate again.It is imperative for China's monetary policy to make a rapid and correct response to liquidity.Therefore,combined with China's financial system,it is necessary and urgent to study the impact of monetary policy on bank liquidity from the perspective of financial leverage.This paper studies monetary policy,financial leverage,and bank liquidity under a unified framework to provide a quantitative basis for monetary authorities and regulatory authorities on liquidity management and leverage management and then provide scientific references for the healthy development of China's economy and finance.According to the logical chain of "concept definition and theoretical basis ?current situation analysis ? theoretical analysis ? empirical analysis ?Conclusions and policy recommendations," this paper focuses on the in-depth study of "the impact of monetary policy on bank liquidity from the perspective of financial leverage."This paper attempts to make an in-depth theoretical analysis and empirical test on the following four aspects: First,under the normalization of the novel coronavirus pneumonia,what is the current status of monetary policy,financial leverage,and bank liquidity,and how are they different from before? Second,how the three types of monetary policies(quantitative,price and structural)affect the bank liquidity and what the effect is,with the impact of the structural monetary policy implemented in recent years needs to be primarily focused on;Third,as a way to influence the liquidity of banks,whether there is an intermediary effect between monetary policy and bank liquidity,and how to influence the mechanism behind it;Fourth,after introducing the financial leverage perspective,how the monetary policy,financial leverage and financial leverage fluctuation will have on the liquidity of the banking system,which is the general linear relations or the nonlinear relations that have the period dependence.This paper mainly studies the following five parts.Firstly,related concepts and theoretical basis.It systematically analyzes the related concepts and measurement indicators of monetary policy,financial leverage,and bank liquidity.At the same time,it introduces the monetary policy and liquidity supply theory,liquidity creation theory and leverage theory in detail to provide theoretical support for the follow-up research.Secondly,characteristic facts.This paper analyzes the current monetary policy,financial leverage,and bank liquidity to find the internal correlation among them to provide the factual basis for the later theoretical analysis and research hypothesis.Thirdly,theoretical analysis and research hypothesis.From the perspective of financial leverage,this paper profoundly combs the relationship between monetary policy and bank liquidity,constructs the corresponding theoretical analysis framework,and carries out the following three aspects of theoretical analysis,and then puts forward research hypotheses: 1.The impact of monetary policy on bank individual liquidity;2.The impact of monetary policy on the liquidity of banking system under the intermediary effect of financial leverage;3.The impact of monetary policy,financial leverage,financial leverage volatility on the liquidity of the banking system.The above three levels of theoretical analysis and research hypothesis,layer by layer,in order to get the following empirical test.Fourthly,empirical test.Combined with the previous three levels of research hypotheses,this part carries out the following empirical tests: The micro empirical test of the impact of monetary policy on bank individual liquidity;The macro empirical test of the impact of monetary policy on the liquidity of the banking system——Based on the intermediary effect of financial leverage;Macro empirical test of the impact of monetary policy on the liquidity of banking system——Based on financial leverage and its volatility.Fifthly,the conclusion and policy recommendations.Based on summing up the full text of the research,the paper draws the research conclusions and puts forward some suggestions according to the research conclusions.The main conclusions are as follows:Firstly,when the novel coronavirus pneumonia outbreak in early 2020,the stable monetary policy was relatively loose,the role of structural monetary policy tools was highlighted,and its application frequency was significantly increased.In the past two years,the banking system's liquidity had been loose on the surface and tight in reality due to novel coronavirus pneumonia.Still,it had been eased and kept in a rational and abundant situation.Also,financial leverage began to rise in 2008 and started to fall in 2016,with signs of rising financial leverage caused by novel coronavirus pneumonia.Secondly,price type,quantity type and structural type of monetary policy will have a significant impact on the individual liquidity of banks,but there is heterogeneity for different types of banks.The benchmark lending rate and the statutory deposit reserve ratio were negatively correlated with the bank's liquidity,while the standing lending facility was positively correlated with its liquidity.The impact of benchmark lending rate on the liquidity of state-owned banks and joint-stock banks is small,but the negative impact on local banks is enormous;The increase of statutory deposit reserve ratio has little impact on the liquidity of joint-stock banks;The improvement of standing lending facility has a positive effect on the liquidity of local banks.Thirdly,financial leverage had a significant mediating effect on the monetary policy's impact on the banking system's liquidity,and the mediating effect was more significant under M1 than M2.Fourthly,there are dynamic nonlinear and asymmetric effects among monetary policy,financial leverage,financial leverage volatility and banking system liquidity,which depend on the stage of economy and finance.Loose monetary policy and rising financial leverage have positive effects on the liquidity of the banking system;The increase of financial leverage volatility has a restraining effect on the liquidity of the banking system.Fifthly,this paper puts forward some targeted policy recommendations:combining traditional monetary policy with structural monetary policy,primarily focusing on the role of structural monetary policy;Strengthen the real-time monitoring and precise regulation of financial leverage,and grasp the direction,strength and rhythm of regulation;We should balance financial leverage,bank liquidity and financial stability,and we should not reduce the level of financial leverage significantly in the future.The possible innovations of this paper are as follows:Firstly,this paper studies monetary policy,financial leverage and bank liquidity in a unified framework,and deeply analyzes the impact of monetary policy on bank liquidity from the perspective of financial leverage.It breaks through the limitation that most studies only focus on the relationship between monetary policy and bank liquidity,and helps to improve the theoretical framework and macro-control system of the interaction among monetary policy,financial leverage and bank liquidity.In real life,the dynamic adjustment of monetary policy,the continuous volatility of financial leverage and the rapid change of bank liquidity show that the three should be closely related and interact with each other.Therefore,it is necessary to bring monetary policy,bank liquidity and financial leverage into a unified framework.Secondly,this paper introduces financial leverage as an intermediary variable into the theoretical and empirical analysis of the impact of monetary policy on bank liquidity for the first time,and verifies whether financial leverage is the intermediary of monetary policy on bank liquidity,which deepens the research depth of this issue and makes the theoretical and empirical analysis more realistic and convincing,The conclusion can also provide the basis for the central bank to manage liquidity with the help of financial leverage accurately.Thirdly,this paper breaks through the limitations of the previous simple linear relationship hypothesis,by using the Markov regime transfer vector autoregressive model(MS-VAR model)to study the nonlinear linkage between monetary policy,financial leverage,financial leverage volatility and bank liquidity.Because the research time span of this paper includes financial crisis,European debt crisis,the money shortage,the Sino US trade war and the Novel coronavirus pneumonia.The economic and financial environment has changed dramatically.If the fixed-parameter linear model is used to study,we can not get accurate and reliable conclusions.Therefore,this paper uses a nonlinear model with regional system transfer to describe better the dependence of the interaction between variables on the economic and financial environment.Fourthly,this paper makes an empirical study on structural monetary policy creatively.With the increasing use of structural monetary policy at home and abroad,the research on the influence of monetary policy on bank liquidity has been enriched and perfected.At present,in the theoretical and empirical analysis of monetary policy,most of the research objects are still the conventional quantitative and price monetary policies,and few of them have the research results of structural monetary policy as the research object.Especially,the implementation of structural monetary policy in China is short,and there is no systematic theory.Most of the reported researches are based on qualitative and comparative analysis,while empirical analysis is relatively rare.Under the increasing domestic and foreign practice of macro-control on structural monetary policy,this paper adds new content to the research on the impact of monetary policy on bank liquidity.