The Effect Of Excess Reserves On Bank Risk-Taking Behavior

In early 2000s, excess reserves of Chinese banks have reached 10% on average. Although this figure have fallen to 3.3% in 2012, it is still significantly higher compared to financially developed areas such as the United States and the European Union. The excess reserves in the Chinese banking sector indicates surplus liquidity, which leads to banks taking excess risk and their tail risk becoming less obvious. Compared to extant studies on that focused on how excess reserves impact the effectiveness of monetary policies, this paper further connects the monetary policy transmission mechanism with effect of excess reserves have on bank risk-taking. This paper introduces a specialized perspective of involuntary excess reserves and explores the effect of excess reserves on bank risk-taking behavior and if this effect varies under different monetary policies.The paper divides into five main sections. First, the paper summarizes related research and introduces the research proposal and technical roadmaps. Second, the paper analyzes the theoretical basis of the effects of excess reserve on bank risk-taking behavior. Based on related concepts, the paper analyzes Chinese banks'excess reserves and elaborates on the effects of excess reserves on bank risk-taking behavior. Furthermore, based the DLM model suggest by Ariccia (2010), the paper improves and demonstrates the mechanism through which excess reserves effect bank risk-taking behaviors. Selecting bi-annual data from 2005 to 2015, the paper establishes a dynamic panel model and empirically analyzes the effects of excess reserves and involuntary reserves on bank risk-taking behavior to verify the existence of the monetary policy bank risk-taking channel. The results have verified the existence of the bank risk-taking channel of monetary policies, and excess reserves and involuntary reserves have a significant stimulating effect on banks' risk-taking behavior. At last, the paper provides concluding remarks and provides related policy suggestions.The innovation of this paper is reflected in two aspects. First, the paper introduces involuntary excess reserves and overcomes over generalization and lack of quantitative analysis. The paper selects a data sample with bi-annual interval and solves the problem of an overly extensive interval of past researches. Second, the paper employs mathematical models, using both quantitative and qualitative approaches to analyze the effect of excess reserves on banks'profitability and debt costs, which further impacts banks'risk-taking behavior.