Interbank liquidity transmission and the credit channel of monetary policy in China

This paper investigates the liquidity transmission of traditional and structural monetary policy instruments in the interbank market and their effects on bank credit growth based on 107 banks from 2005Q4 to 2020Q4 in China. We find that the credit channel of monetary policy differs across banks with heterogeneous liquidity acquisitions. The liquidity released by open market operations (OMOs) cannot stimulate credit growth, but increases the net interbank assets of primary banks and reduces those of non-primary banks. The reduction of the required reserve ratio (RRR) increases the net interbank assets of non-primary banks and stimulates non-primary banks' credit growth. Furthermore, a higher interbank financing ratio reduces the credit channel of RRR reduction in non-primary banks. In addition, medium- and small-sized banks would increase credit growth and reduce reliance on interbank financing, as the structural monetary policy instrument of medium-term lending facilities (MLFs) plays a growing role post-reform.

Automated summary

This study examines the liquidity transmission of monetary policy instruments and their impact on bank credit growth in the interbank market in China. The findings indicate that the credit channel of monetary policy varies among banks due to their differing liquidity acquisitions. Open market operations (OMOs) do not stimulate credit growth but affect the net interbank assets of different categories of banks differently. The reduction of the required reserve ratio (RRR) influences non-primary banks' credit growth and interbank assets, and a higher interbank financing ratio weakens the impact of RRR reduction on non-primary banks. Additionally, medium- and small-sized banks rely less on interbank financing and experience increased credit growth due to the growing role of medium-term lending facilities (MLFs).