Does monetary policy impact bank risk-taking? An empirical study based on the data of 119 commercial banks in China

Yukun Li, Mujun Deng, Yuqing Cui and Jing Pan

Finance Research Letters, 2025, vol. 81, issue C

Abstract: Adopting the GMM estimation method, we examine the impact of monetary policy on bank risk-taking using panel data of 119 commercial banks in China over a complete monetary policy cycle, and explore its existence and asymmetry. The results indicate that a loose monetary policy will increase bank risk-taking, and conversely, a tight monetary policy will decrease it. Furthermore, it clarifies that the incentive effect of loose monetary policy on bank risk-taking is more pronounced than the restrictive impact of tight monetary policy. The conclusion serves as a reminder of the potential financial risks in China that could arise from the resumption of a moderately loose monetary policy by late 2024. Finally, we suggests re-evaluating the credit channel of monetary policy, considering financial stability when assessing its effectiveness, and deepening reform of the financial regulatory system.

Keywords: Loose monetary policy; Bank risk-taking; Financial stability; Monetary policy cycle; Asymmetrical effect (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:81:y:2025:i:c:s1544612325008062

DOI: 10.1016/j.frl.2025.107547

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