Bank Risk-Taking, Credit Allocation, and Monetary Policy Transmission: Evidence from China

Xiaoming Li, Zheng Liu, Yuchao Peng and Zhiwei Xu ()

American Economic Journal: Macroeconomics, 2026, vol. 18, issue 1, 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.

JEL-codes: E52 G21 G28 L32 O16 P24 P34 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/mac.20220177

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