An Economic Evaluation of Targeted Reserve Requirement Ratio Reduction on Bank Ecosystem Development

Abstract

In China’s bank-centered financial and economic environment, bank risk attitudes have an important impact on the effective implementation of structural monetary policy, and monetary policy can have an impact on the corporate ecosystem through risk taking by banks. To make an economic assessment of the evolution of the banking ecosystem and empirically explore the correlation between targeted Reserve Requirement Ratio (RRR) cuts and banks’ risk-taking levels in the context of financial supply-side structural reforms, this paper uses multiple regression analysis and a fixed-effects model to analyze the causal impact of targeted RRR reduction on the risk taking of Chinese commercial banks. In addition, it uses the mediation effect model to analyze the mechanism. Results show that targeted RRR cuts have significantly increased the level of risk taking of commercial banks. The findings are pronounced in urban commercial banks. However, the leverage ratio regulation has a restraining effect on the level of risk taking of banks. This study provides an effective economic evaluation for the benign development of the banking ecosystem under the environment of government policy supervision. Future research needs to expand the bank sample and further examine the changes in bank credit scale and credit investment.