Monetary Policy, Deposit Structure, and Bank Risk-Taking: Evidence from China

This study examines the monetary policy risk-taking channel in China and asks whether banks’ deposit structure moderates balance sheet responses to policy innovations. Using an unbalanced panel of 698 Chinese commercial banks from 2013 to 2023, we proxy portfolio risk with risk weighted assets divided by total assets. Monetary policy shocks are measured by the exogenous component of M2 growth extracted from a Taylor rule framework, and deposit structure is captured by the shares of demand deposits and time deposits. Fixed effects estimates indicate that accommodative policy innovations are associated with higher portfolio risk. The moderation results show that a larger demand deposit share significantly strengthens this association, whereas the time deposit share has a weaker moderating effect. The response is heterogeneous across ownership types, with stronger effects among joint stock banks and city and rural commercial banks and weaker effects among large state-owned banks after controlling for bank-specific heterogeneity. The findings contribute to the literature by highlighting liability side conditions, particularly deposit composition, as a key state variable shaping monetary transmission in China’s bank centred system. Monitoring deposit mix may help identify bank segments more prone to risk accumulation during accommodative cycles.