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

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Listed:
  • Xiaoming Li
  • Zheng Liu
  • Yuchao Peng
  • Zhiwei Xu

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.

Suggested Citation

  • Xiaoming Li & Zheng Liu & Yuchao Peng & Zhiwei Xu, 2026. "Bank Risk-Taking, Credit Allocation, and Monetary Policy Transmission: Evidence from China," American Economic Journal: Macroeconomics, American Economic Association, vol. 18(1), pages 384-415, January.
    • Handle: RePEc:aea:aejmac:v:18:y:2026:i:1:p:384-415
    DOI: 10.1257/mac.20220177
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    References listed on IDEAS

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    1. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    2. Eric Girardin & Sandrine Lunven & Guonan Ma, 2017. "China's evolving monetary policy rule: from inflation-accommodating to anti-inflation policy," BIS Working Papers 641, Bank for International Settlements.
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    More about this item

    JEL classification:

    • 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
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

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