Using confidential loan-level data from a large Chinese bank, we examine how Basel III implementation influenced the responses of bank risk-taking to monetary policy shocks. 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 tradeoff facing China’s monetary policy between curbing bank risks and addressing credit misallocation.
Suggested citation:
Li, Xiaoming, Zheng Liu, Yuchao Peng, and Zhiwei Xu. 2024. “Bank Risk-Taking, Credit Allocation, and Monetary Policy Transmission: Evidence from China.” Federal Reserve Bank of San Francisco Working Paper 2020-27. https://doi.org/10.24148/wp2020-27