Interest rate liberalization and the procyclicality of the bank liquidity buffer: Evidence from China

Hai Jiang, Yunfan Zhu, Chao Yuan and Xiaolin Zhang

Journal of Asian Economics, 2025, vol. 98, issue C

Abstract: This paper investigates the impact of interest rate liberalization (IRL) on the procyclicality of the bank liquidity buffer based on data of 377 commercial banks in China from 2007 to 2019. The results show that the liquidity buffer is procyclical. The advancement of IRL diminishes the bank liquidity buffer and exacerbates its procyclicality. The expansion of the fluctuation level of interest rate, one dimension of IRL, is the dominant driving factor. Furthermore, this paper finds that the effect of IRL on the procyclicality of the liquidity buffer is amplified in non-primary, joint-stock, city and less-profitable banks. Additionally, the IRL has a higher negative impact on the liquidity buffer of banks that engage in greater risk-taking.

Keywords: Economic cycle; Liquidity buffer; Procyclicality; Interest rate liberalization (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:asieco:v:98:y:2025:i:c:s1049007825000284

DOI: 10.1016/j.asieco.2025.101904

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