American Economic Journal:
Macroeconomics
ISSN 1945-7707 (Print) | ISSN 1945-7715 (Online)
Bank Risk-Taking, Credit Allocation, and Monetary Policy Transmission: Evidence from China
American Economic Journal: Macroeconomics
(pp. 384–415)
Abstract
Using confidential loan-level data, we examine how Basel III influenced the responses of bank risk-taking to monetary policy shocks in China. We use a difference-in-differences (DID) approach, exploiting disparities in lending behavior between high- and low-risk bank branches before and after the new regulations. Our findings reveal a novel risk-weighting channel through which monetary policy easing significantly reduced bank risk-taking. However, this risk reduction was achieved by shifting lending towards ostensibly low-risk state-owned enterprises (SOEs) with government guarantees, despite their lower average productivity. Our findings suggest a trade-off facing China's monetary policy between curbing bank risks and addressing credit misallocation.Citation
Li, Xiaoming, Zheng Liu, Yuchao Peng, and Zhiwei Xu. 2026. "Bank Risk-Taking, Credit Allocation, and Monetary Policy Transmission: Evidence from China." American Economic Journal: Macroeconomics 18 (1): 384–415. DOI: 10.1257/mac.20220177Additional Materials
JEL Classification
- E52 Monetary Policy
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G28 Financial Institutions and Services: Government Policy and Regulation
- L32 Public Enterprises; Public-Private Enterprises
- O16 Economic Development: Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
- P24 Socialist Systems and Transitional Economies: National Income, Product, and Expenditure; Money; Inflation
- P34 Socialist Institutions and Their Transitions: Financial Economics