How does liquidity regulation influence the effect of monetary policy transmission? A structural analysis based on the classified assets of chinese commercial banks

Hongfeng Peng, Zhichao Zhang and Zimin Liang

Research in International Business and Finance, 2025, vol. 78, issue C

Abstract: The coordination between liquidity regulation and monetary policy is of great significance for the stability of financial markets. This study subdivides the credit assets of commercial banks, modifies the research framework based on the banks’ balance sheet, and uses theoretical modeling to depict the changes in the effect of monetary policy transmission to various classified assets of banks after introducing the Net Stable Funding Ratio (NSFR) constraint. Subsequently, using semi-annual data samples of Chinese commercial banks from 2015 to 2022, the paper empirically analyzes the impact of liquidity regulation on the asset structure and credit scale of commercial banks and the effect of monetary policy credit transmission. The research results show that: Firstly, liquidity regulation has a strong constraining effect on the expansion of the proportion of classified loans and the scale of credit, and it also affects the effect of monetary policy transmission. This effect gradually weakens and eventually becomes ineffective as the NSFR increases. Secondly, in order to meet liquidity regulation requirements, commercial banks generally adopt the approach of lowering the proportion of high-risk loans and increasing the holdings of securities, which is not only an important channel for regulatory policy to affect the overall effect of monetary policy transmission but also the main reason for the weakening of the aforementioned transmission effect. Finally, the impact of liquidity regulation on the effectiveness of monetary policy transmission is highly heterogeneous across bank ownership types, liquidity levels, and economic environments. When banks can effectively control the risk of certain credit assets, the effect of monetary policy transmission to such loans is enhanced, and liquidity regulation and monetary policy can achieve better coordination at this time.

Keywords: Liquidity regulation; Monetary policy transmission; Asset structure (search for similar items in EconPapers)
JEL-codes: E52 E61 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:78:y:2025:i:c:s027553192500234x

DOI: 10.1016/j.ribaf.2025.102978

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