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

Muntazir Hussain (Faculty of Business, Sohar University, Sohr, Oman)
Usman Bashir (Department of Economics and Finance, College of Business Administration, University of Ha'il, Ha'il, Saudi Arabia)
Ahmad Raza Bilal (Faculty of Business, Sohar University, Sohr, Oman)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 1 May 2020

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.

Keywords

Acknowledgements

Muntazir Hussain and Usman Bashir contributed equally to the manuscript and they thank the Editor in Chief Ilan Alon, Senior Editor Dayong Zhang and the anonymous reviewers for their constructive comments.

Citation

Hussain, M., Bashir, U. and Bilal, A.R. (2020), "Effect of monetary policy on bank risk: does market structure matter?", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-09-2019-0674

Publisher

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Emerald Publishing Limited

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