The unintended interaction effect of monetary and macroprudential policies: Evidence from China’s bank-level data

We investigate the unintended interaction effect of monetary and macroprudential policies on banks’ broad credit, using Chinese bank-level data from 2005 to 2019. According to our findings, tightening both macroprudential and monetary policies simultaneously in China expands broad credit, which diff...

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Bibliographic Details
Published in:Finance research letters 2024-09, Vol.67, p.105797, Article 105797
Main Authors: Hou, Shuting, Zheng, Bowen
Format: Article
Language:English
Subjects:
Bank broad credit
Macroprudential policy
Monetary policy
Non-deposit funding
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Summary:We investigate the unintended interaction effect of monetary and macroprudential policies on banks’ broad credit, using Chinese bank-level data from 2005 to 2019. According to our findings, tightening both macroprudential and monetary policies simultaneously in China expands broad credit, which differs from traditional empirical findings in other countries that such policy conditions typically result in credit contraction. We reveal that the non-deposit funding channel drives the unintended surge in broad credit under the interaction of macroprudential and monetary policy. •The contraction of macroprudential and monetary policies in China unexpectedly leads to broad credit expansion.•Non-deposit funding channels play a critical role in driving the unexpected surge in broad credit.•Banks leverage non-deposit funds for credit expansion, pursuing profits under high funding costs.
ISSN:1544-6123
DOI:10.1016/j.frl.2024.105797