Bank capital structure and monetary policy risk-taking sensitivity: Theory and empirical evidence

By constructing a three-period dynamic model involving banks, non-deposit liability holders, and equity holders, this paper systematically elucidates the theoretical mechanism through which bank capital structure influences its sensitivity to monetary policy-induced risk-taking. Additionally, the paper treats bank IPOs as a quasi-natural experiment and employs a triple difference-in-differences (DDD) approach for empirical validation. The theoretical analysis reveals an inverted U-shaped relationship between the proportion of bank equity capital and its sensitivity to monetary policy-induced risk-taking. Empirical results demonstrate that when a bank’s equity capital ratio is relatively low, the liquidity constraint effect predominates. In this scenario, an increase in the equity capital ratio significantly heightens the sensitivity to monetary policy-induced risk-taking among banks with lower equity levels. Conversely, when the equity capital ratio reaches a certain threshold, the market discipline effect becomes dominant. Under these conditions, a further increase in the equity capital ratio significantly reduces the sensitivity to monetary policy-induced risk-taking among banks with moderate to high equity levels. These findings provide evidence for the inverted U-shaped relationship between bank equity capital ratio and its sensitivity to monetary policy-induced risk-taking. This paper underscores that selecting an appropriate capital structure can help banks minimize the increase in risk levels resulting from monetary policy changes.