Research On Risk-taking Channel Of Monetary Policy In China

It is now widely acknowledged that the collapse of the United States’ subprime mortgage sector beginning in 2008 finally resulted in the financial crisis of 2007-2008 and the 2008-2012 global recession, which have been considered by many economists the worst crisis ever since the Great Depression of the 1930s. In the aftermath of the crisis, a discussion has been carried out among scholars and policymakers centered on the relationship between monetary policy and financial stabilization. Some blame the Fed’s loose monetary policy from 2002 for laying the foundations for the crisis. They argue that low interest rates may encourage banks to take on excessive risk (increasing investments in high-risk assets, relaxation of credit standards, etc.), which in turn leads to an increase in the riskiness of the financial sector, and finally a rise in the probability of financial crises. The response of the banking system to take on more risk during a period of decreasing asset returns is usually referred to as the risk-taking channel of monetary policy.Thanks to strict capital requirements and a more prudent process of financial liberalization, China has survived the recession. Nevertheless, the mechanism of the risk channel is similar across countries. It is quite possible that the ease monetary conditions in recent years, which are aimed at maintaining the high rate of economy growth, may have rendered the banking system fragile and vulnerable. Therefore, it is still necessary to examine and explore the risk channel of monetary policy in China.In this paper, the study of the risk channel in China is carried out in five sections. The first section is an introduction of the background and importance of the topic. The second section is a review of relevant literature. The third section describes how the empirical model is built up. The fourth section presents the empirical results. The last section draws conclusions and implications.The main results are summarized as follows. First, the risk channel of monetary policy does exist in China, where the risk taking of banks will increase in response to interest rate decrease resulted from ease monetary policy. Second, the size of the effects depends to some extent on banks’ characteristics. Third, compared to long-term interest rates, short-term interest rates have stronger impacts on banks’risk taking. Fourth, the longer the loose monetary conditions continue, the stronger the risk channel will be. In contrast to foreign evidence, the impact of the 2008 financial crisis on the risk channel appears insignificant in China. Finally, risk-taking channel can influence traditional bank lending channel channel, which strengthens the impact of monetary policy on bank lending scale.