The Impact Of Monetary Policy On Banks’ Asset Allocation

China is now during the process of interest marketization, and the indirect financing plays a predominant role in China’s financing system. Therefore, the credit channel of monetary policy is of great importance. However, the effectiveness of the credit channel of the monetary policy is facing challenges. This is based on the fact that after the central bank adjusted the monetary policy, the commercial banks will correspondently change their asset-liability portfolio in order to avoid the impact of the monetary policy. Consequently, it is meaningful to deeply analyze banks’ asset-liability portfolio adjustment behavior in order to improve the effectiveness of the monetary policy.This paper uses the revised two-period commercial banks’asset-liability portfolio model and collets data from the CSMAR database and Bankscope database, in order to analyze the impact of monetary policy on the asset allocation of commercial banks. The empirical results reveal that once the Central Bank of China adjusts the monetary policy, the credit scale of the commercial banks changes correspondently. The sub-sample analysis implies that there are variations between commercial banks of different sizes, which means that the impact of monetary policy on big commercial banks is relatively smaller than that on small commercial banks. Also, the security holdings of commercial banks change in order to buffer the impact on the credit scale. The sub-sample analysis implies that the security holdings of small-sized commercial banks change more than that of the big commercial banks, which means that the small-sized commercial banks tend to adjust the security holdings in order to buffer the impact of the monetary policy.When the central bank implements the monetary policy, the commercial banks’ self-adjustment of the asset portfolio negatively affects the effectiveness of the credit channel of the monetary policy. Therefore, in order to improve the effectiveness of the monetary policy, the central bank needs to put banks’self-adjustment of the asset portfolio into consideration. Moreover, the central bank should gradually transform the monetary policy tool from the reserve ratio to the interest, based on the fact that the interest could reflect the supply and demand of capital and increase the effectiveness of the monetary policy.