Research On Bank Risk-taking Channel And The Effect Of Monetary Policy In China

As the financial crisis swept the entire globe, many scholars think that long term easy monetary policies are at the root of this crisis. Based on the validity of the theory of monetary policy transmission mechanisms, the paper’s objectives are to verify the existence of risk-taking transmission channels of monetary policies and specific conduction effects, as well as to analyze effects of monetary policy on bank’s risk-taking behavior.The paper expands on aforementioned objectives and is divided into five sections. The first section describes the background, the significance and methods of the research and relative literatures. In the second section, the paper defines related concepts and analyzes traditional transmission channels of monetary policy, followed by theoretical analysis and empirical proofs of the four main transmission channels. Through derivation of mathematical models, the existence of such channels is proved by analysis of transmission channels under fixed and optimized mortgage rate. Through the systematic Gaussian Mixture Model (GMM), the third sections conducts empirical analysis and results have shown that the bank risk-taking channels are significant in the long term. In the fourth section, the paper uses practices from system dynamics to establish causal loop diagrams to demonstrate the relationship between various factors affecting the banks’risk-taking behaviors and constructs a systemic process. Based on these diagrams and models, the paper proves that long term easy monetary policies will promote banks to undertake increase amount of risks. The fifth section contains conclusions of the research and related policy recommendations.The innovation of the paper is displayed in two aspects. First, the paper verifies the banks’ reaction to both short and long term monetary policies. Different from existing literature that directly chooses the market interest rate as the variable representing monetary policy, the pa-per employs Tyler’s rule to forecast and calculate more realistic interest rate. Second, the paper employs methods from system dynamics and constructs a simulation scenario of risk-taking behavior channel of monetary policies. Utilizing system dynamics flow charters, the paper graphically demonstrates the variation of banks’ risk-taking behavior under long-term easy monetary policies.