A Study Of Risk-taking Channel Of Monetary Policy

With the U.S.2007subprime mortgage crisis occurred, academia and politics began to explore the reasons that caused this crisis. Altunbas et.al (2011) thought that too low for too long interest rates would increase the whole financial system’s volatility, especially when they were less than the base line of Tylor rule. Maddaloni and Peydro(2013) made a research based on the credit standard investigation data of Europe and U.S.,drew a conclusion that during the very low interest rates time, the banks tended to greatly relax their lending standard for businesses or even individual housing. In the presence of a high degree of securitization, the lack of regulation and low interest rates for long time, this kind of relaxation would be further amplified, especially for mortgage loans. Some people pointed directly that the lasting-long low interest rate environment is the main reason caused this global crisis. Before the financial crisis, there was a booming in real estate market of U.S. and other countries. This led people to rethink on monetary policy, because the goal of traditional monetary policy was generally economic growth, price stability, full employment and balance of international payments. But it ignores the effect of monetary policy on bank’s risk-taking, which just is the right reason caused this crisis. Therefore, it attracted many scholars’interest in doing research in this area after the crisis. Borio and Zhu (2008) corned this term "Risk-taking channel of monetary policy", when they written the BIS working paper. They defined it as "the impact of changes in policy rates in either risk perception or risk-tolerance and hence on the degree of risk in the portfolios, on the pricing of assets, and on the price and non-price terms of the extension of funding".Although the financial crisis did not have a great impact on China’s economy, however, exploring the risk-taking channel of monetary policy also has a very important practical meaning for our country. Because China has been advancing the interest rate reform for a long time, but before it finished, the monetary policy makers mainly used quantitative tools like the amount of credit supply, rather than price tool to adjust economy. Thus, the study aimed at having a comprehensive understanding of monetary policy transmission, an help policy makers to choose some more effective means of macroeconomic control, and also has a profound positive effect to safeguard our country’s financial stability. In addition, studying the risk-taking channel also has a great macro-prudential meaning, because the monetary policy is not absolutely neutral (Diamond and Rajan,2009; Gambacorta,2009; Delis and Kouretas,2011), that is, the same degree of easing monetary policy and tight monetary policy does not have the same effect on economy. The study of this channel not only means having a new perspective on monetary policy transmission, but also means that we notice the bank’s risk-taking was ignored by the traditional macroeconomic theories and models (Lopez et, al,2011),in which banks just act as a passive role, thus, many researches only concern the quantity of credit rather than its quality. Therefore, with the increasing study of this new channel, including monetary policy into macro-prudential framework, emphasizing its un-neutral characteristic, can highlight the importance of market participants’ reaction to maintain financial stability, and can fix the shortcoming of current economic model.This paper is divided into six parts to study the risk-taking channel of monetary policy. The first part is an introduction, describing the background of this article, the significance of the topic, the overall arrangements and its creation and shortcomings. The second part is the general theory of risk-taking channel, including its concept, five transmission ways and its difference from other monetary policy channels. The third part is the conclusion of researches related to risk-taking channel, including foreign and domestic scholars’empirical studies. The fourth part studies the main factors that influence risk-taking channel of monetary policy. This part is divided into three subpart, including macroeconomic situation, industry and bank’s characteristics. The fifth part is data study, establishing a dynamic panel model then using the SYSGMM method to get the estimation result. The last part makes the conclusion and gives some suggestions.By reviewing many studies related to risk-taking channel of monetary policy and doing empirical research, we get the following results:(1) this channel exists in China’s banking industry, as banks risk variable (RISK) is significantly negatively related to proxy variable of monetary policy (M2).(2)Macroeconomic environment has a positive effect on risk-taking channel.(3) Risk-taking channel will affected by banks’scale, profitability, capital adequacy and its ability to absorb deposits.