The impact of excess reserves beyond precautionary levels on Bank Lending Channels in China

This study examines the bank lending channel and the impact of bank-specific characteristics on credit supply in response to monetary policy changes in respect of involuntary excess reserves in China. Using a sample of 95 banks, this study finds that the interaction of involuntary excess reserves with bank liquidity and with large bank size is more vulnerable to monetary policy shocks, while capitalisation has an insignificant impact on credit supply in response to monetary policy changes. Our results indicate that involuntary excess reserves, the size of the bank and liquidity are important in assessing the effect of monetary policy on loan growth. This implies that an agency problem, such as volume-based compensation, appears to drive bank lending and risk-taking behaviour in China.