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Effect of monetary policy on bank risk: does market structure matter?

Author

Listed:
  • Muntazir Hussain
  • Usman Bashir
  • Ahmad Raza Bilal

Abstract

Purpose - The purpose of this paper is to investigate the risk-taking channel of monetary policy transmission in the Chinese banking industry. This study also investigates the role of various other factors in the risk-taking channel. Design/methodology/approach - This study used panel data from 2000 to 2012, and a dynamic panel model (Difference GMM) was applied. Findings - The empirical findings of this paper suggest that loose monetary policy rates increase bank risk-taking. Unlike previous studies, the results of this paper suggest that the bank-specific factors (size, liquidity and capitalization) do not significantly affect the risk-taking channel. However, the market structure does have a stabilizing effect on monetary policy transmission and the risk-taking channel. Higher market power weakens the risk-taking channel of monetary policy transmission. Practical implications - Of significance to the policymakers' point of view is that loose monetary policy induces banks to take excessive risks. However, such effects can be mitigated by encouraging a proper level of market power in banking markets. Originality/value - This study investigated the risk-taking channel of monetary policy transmission for the Chinese banking industry. Due to the unique features of the People's Bank of China (PBC, Central Bank of China) policy, this study also contributes to the literature by comparing price-based and quantity-based monetary policy tools and their effectiveness in financial stability and monetary policy transmission. Furthermore, the role of market structure is also investigated in the risk-taking channel.

Suggested Citation

  • Muntazir Hussain & Usman Bashir & Ahmad Raza Bilal, 2020. "Effect of monetary policy on bank risk: does market structure matter?," International Journal of Emerging Markets, Emerald Group Publishing Limited, vol. 16(4), pages 696-725, April.
    • Handle: RePEc:eme:ijoemp:ijoem-09-2019-0674
    DOI: 10.1108/IJOEM-09-2019-0674
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    More about this item

    Keywords

    Monetary policy; Risk-taking channel; Market structure; Bank risk; E44; E52; G21;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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