The Influence Of Adjustment Of Chinese Required Reserve Ratio On Commercial Bank' Liquidity Creation

Commercial bank's liquidity creation,means the process and role that banks take liquid liabilities like deposit and make illiquid assets like loans,and that bank conduct off-balance sheet activities like loan commitments.According to the modern theory of financial intermediary,liquidity creation is one of the basic function of commercial banks.In china,the stock market and the bond market have not well developed,so the role of bank's liquidity creation seems to be more important.However,Chinese researches on the topic of liquidity creation are still limited,and most literatures focus on the impact of bank internal factors on bank's liquidity creation.Few of the domestic literature focus on the impact of monetary policy on bank's liquidity creation.In the last few years,the Central Bank of China frequently adjust the required reserve ratio to regulate the macro economy.Thus,under the background,it is meaningful to study the impact of the adjustment of required reserve ratio of china on commercial banks' liquidity creation.Specifically,I state the theory of liquidity creation and required reserve ratio,such as the definition of liquidity creation and the meaning of required reserve ratio.Then,I measure the liquidity creation of the banks in china and state the adjustment of required reserve ratio of china.Afterwards,I do the qualitative and quantitative analysis on the topic that the influence of adjustment of required reserve ratio on bank's liquidity creation.In the qualitative analysis,we know that banks can create liquidity on the balance sheet and off the balance sheet.Thus,I respectively analyze the effect of monetary policy on on-balance sheet activity and on off-balance sheet activity,and then analyze the comprehensive effect of the adjustment of required reserve ratio on bank's liquidity creation.The results show that increasing the required reserve ratio will lead to a reduction in banks' liquidity creation and that decreasing the required reserve ratio will lead to an increase of bank's liquidity creation.In quantitative analysis,based on the measurement method of liquidity creation from Berger and Bouwman(2009),using the financial data of 111 Chinese commercial banks during the period of 2005-2015,I measure the liquidity creation of 111 Chinese banks,and empirically test the impact of the adjustment of required reserve ratio on banks' liquidity creation.The results show that the coefficient estimate of the required reserve ratio is-0.0062 and significantly negative,which means that the liquidity creation per asset will decline 0.0062 if the required reserve ratio goes up 1%.In other words,increasing the required reserve ratio will lead to a reduction in banks' liquidity creation and that decreasing the required reserve ratio will lead to an increase of bank's liquidity creation.Based on the conclusion of the qualitative analysis and the quantitative analysis,corresponding suggestions are given to the management of commercial banks and the adjustment measure of required reserve ratio of the Central Bank of China.