The Non-linear Effects Of Monetary Policies On Bank Risk Based On The PSTR Model

Loose monetary conditions (such as low interest rates) become a cause offinancial imbalances and economic fluctuations due to the excessive expansion ofthe credit scale to which they often give rise. After the occurrence of theinternational financial crisis in2008, whether monetary policy led to the crisis byincreasing bank-risk behaviors became the domestic and foreign academia andpractice circle controversy’s hot spots and focus. In this debate, the linear analysis ofthe current mainstream monetary policy framework has been criticized. This paperargues that monetary policy has non-linear effects on bank risks. This proposition,which is closely related to China’s financial macro-prudential management, needs tobe verified by the empirical evidence.This paper first elaborates the concept of nonlinearity, the principles andmethods of the panel smooth transition regression model (PSTR), and compares anddemonstrates the applicability of PSTR model in non-linear problems. Then, interms of the intermediate monetary policy target and tools, using expectedprobability of default to measure bank risks and using the ratio of risk-weightedassets to total assets as an alternative indicator of bank risks to take robustness test,this paper estimates and tests the PSTR models of the non-linear effects ofintermediate monetary policy target---money supply, interest rate and the statutorydeposit reserve rate on bank risks by Matlab software. The results indicate that:intermediate monetary policy target has non-linear impacts on bank risks during theexpansion and contraction of monetary policy; intermediate monetary policy targethas non-linear effects on bank risks, which arises from the different macroeconomicsituations and different bank characteristics; interest rate and the statutory depositreserve ratio as monetary policy tools affect bank risks nonlinearly with thechanging of macroeconomic situations and the different bank characteristicsrespectively. At last, aiming at the nonlinear effects, the paper puts forward somecorresponding policy recommendations from the aspects of monetary authorities,commercial banks, and supervision departments.