# Divergent impacts of quantity versus price-based monetary policies on banking systemic risk: Evidence from China

## TL;DR

This study examines how different monetary policies in China affect banking sector risks, finding that price-based policies have mixed effects on systemic risks.

## Contribution

The novel contribution is identifying divergent impacts of monetary policies on systemic risks using structural shocks and distinguishing between bottom-up and top-down risks.

## Key findings

- Contractionary price-based monetary shocks increase bottom-up risks but reduce top-down risks.
- Contractionary quantity-based monetary shocks initially raise bottom-up risks but later reduce them.
- Price-based policies affect state and non-state banks differently, increasing top-down risks in non-state banks.

## Abstract

This study investigates the effects of price-based (PMP) and quantity-based monetary policies (QMP) on systemic risks within China’s banking sector. We identify exogenous components of PMP and QMP by isolating explicit structural shocks in a structural vector autoregression model. Systemic risks are categorized into bottom-up risks, which assess how the distress or default of a single bank can contribute to systemic vulnerabilities, and top-down risks, which evaluate the likelihood of a bank experiencing distress during financial market turbulence. Utilizing a smooth local projection model, we analyze the impact of PMP and QMP on these two types of systemic risks. Our findings reveal that contractionary PMP shocks exacerbate bottom-up systemic risks while mitigating top-down risks. In contrast, contractionary QMP shocks initially elevate but subsequently diminish bottom-up risks, with minimal impact on top-down risks. Importantly, PMP affects state and non-state banks differently, decreasing top-down risks in state banks but increasing them in non-state banks. This differential impact indicates that the risk-taking behavior of non-state banks triggered by contractionary PMP can spill over, amplifying the damage of financial distress for both state and non-state banks.