The effect of stimulus policy on lending behavior and bank risk: Evidence from the Chinese banking sector

Yan Dong and Cong Wang

Emerging Markets Review, 2021, vol. 49, issue C

Abstract: Considering China's stimulus policy in 2008 as a quasi-natural experiment, our study attempts to provide evidence to understand how expansionary monetary policy is likely to influence bank risk-taking in emerging markets, specifically in China. Using data on Chinese counties from 2006 to 2011, we theoretically discuss and empirically observe a positive relationship between the stimulus policy and bank risk-taking, as measured by nonperforming loans. Such a nexus stems from the negative effect of the stimulus policy on banks' lending standards and the positive effect on banks' credit support to small and medium sized enterprises. In addition, our study is enriched by estimating the moderating effects of bank capitalization based on the “risk-shifting” effect and “search for yield” effect caused by the stimulus policy. Specifically, we find important differences across banking groups, such that small and medium-sized banks with low capitalization increase their exposure to risk, while large state-owned banks with high capitalization notably reduce their risk tolerance. The results of this study may help to characterize monetary policy and macro prudential regulation, especially for emerging economies.

Keywords: Monetary policy; Bank risk-taking; Bank capitalization; Difference-in-difference model (search for similar items in EconPapers)
JEL-codes: E44 E52 G21 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1566014120302235
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:49:y:2021:i:c:s1566014120302235

DOI: 10.1016/j.ememar.2020.100761

Access Statistics for this article

Emerging Markets Review is currently edited by Jonathan A. Batten

More articles in Emerging Markets Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().