An Empirical Study on the Effect of the Differentiated Deposit Reserve Policy---Based on the comparative analysis of large and small commercial banks’ liquidity

Abstract

To evaluate the effect of the differentiated deposit reserve policy, based on the Difference in Differences model, this paper empirically analyzes the difference of changes in current ratio between large and small banks due to the raise of the deposit reserve ratio. The main conclusions drawn are as follows: the deposit reserve policy has a significant impact on the liquidity levels of commercial banks in China. Since the differentiated policy implementation, small-scale banks exceed large-scale banks in the increment of current ratio by 2% with only policy factor considered, which means small banks are more positively affected by the new policy. Nevertheless, with other factors added, the liquidity increment of the large-scale banks goes beyond by 0.14% in comparison with small banks. Combined with the fact that the liquidity of small banks is lower than the large ones, it illustrates that the adjustment of the current deposit reserve policy has not made up for the liquidity gaps between large and small banks and the liquidity condition that small banks will confront would be quite severe.