Abstract
This paper addresses the impact of bank liquidity on risk-taking behaviour of Chinese banks, and provides evidence for a risk-taking channel of monetary policy operating through bank liquidity. By using bank-level panel data from 123 Chinese commercial banks during 2003-2018, it is found that banks facing lower liquidity risk will be encouraged to take more risk. Moreover, loose monetary policy leads to more aggressive risk-taking by reducing the bank liquidity risk, namely a liquidity risk-taking channel of monetary policy. These findings suggest that authorities should give full consideration to the influence of the monetary policy on bank risk-taking through bank liquidity channels.
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