RESEARCH ARTICLE
Monetary policy transmission under pandemic uncertainty: Effect on banks' risk and capital adjustments
Moau Yong Toh,
Dekui Jia,
Moau Yong Toh
School of Economics and Management, Xiamen University Malaysia, Sepang, Selangor, Malaysia
Shenzhen Research Institute of Xiamen University, Shenzhen, China
School of Economics, Xiamen University, Xiamen, Fujian, China
Search for more papers by this authorCorresponding Author
Dekui Jia
Department of Finance, Wu Jinglian School of Economics, Changzhou University, Changzhou, Jiangsu, China
Correspondence
Dekui Jia, Department of Finance, School of Economics, Changzhou University, Changzhou 213164, Jiangsu, China.
Email: [email protected]
Search for more papers by this authorMoau Yong Toh,
Dekui Jia,
Moau Yong Toh
School of Economics and Management, Xiamen University Malaysia, Sepang, Selangor, Malaysia
Shenzhen Research Institute of Xiamen University, Shenzhen, China
School of Economics, Xiamen University, Xiamen, Fujian, China
Search for more papers by this authorCorresponding Author
Dekui Jia
Department of Finance, Wu Jinglian School of Economics, Changzhou University, Changzhou, Jiangsu, China
Correspondence
Dekui Jia, Department of Finance, School of Economics, Changzhou University, Changzhou 213164, Jiangsu, China.
Email: [email protected]
Search for more papers by this authorFirst published: 17 September 2024
Abstract
This paper investigates the effects of monetary policy on the simultaneous adjustments in asset portfolio risk and capital of banks amidst the uncertainty of the COVID-19 pandemic, focusing on the 12 largest economies from 2018 Q1 to 2021 Q4. Results indicate that banks show lower portfolio risk and capital levels when the monetary policy stance is eased. However, amid heightened pandemic uncertainty, the risk-reducing effect of monetary policy on banks amplifies, while bank capital levels remain unchanged. Heterogeneity analyses reveal that banks with higher levels of diversification and herding are more responsive to interest rates amid pandemic uncertainty, exhibiting lower risk exposure in their asset portfolios. Banks in countries adopting negative interest rate policies also tend to assume greater asset risk to accommodate the intended stimulus of monetary policies.
CONFLICT OF INTEREST STATEMENT
The authors declare no conflict of interest.
Open Research
DATA AVAILABILITY STATEMENT
The data that support the findings of this study are available from the corresponding author upon reasonable request.
REFERENCES
- Aastveit, K. A., Natvik, G. J., & Sola, S. (2017). Economic uncertainty and the influence of monetary policy. Journal of International Money and Finance, 76, 50–67. https://doi.org/10.1016/j.jimonfin.2017.05.003
- Acharya, V. V., Eisert, T., Eufinger, C., & Hirsch, C. (2019). Whatever it takes: The real effects of unconventional monetary policy. The Review of Financial Studies, 32(9), 3366–3411. https://doi.org/10.1093/rfs/hhz005
- Acharya, V. V., & Yorulmazer, T. (2008). Information contagion and bank herding. Journal of Money, Credit and Banking, 40(1), 215–231.
-
Ahir, H., Bloom, N., & Furceri, D. (2018). The world uncertainty index. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.3275033
10.2139/ssrn.3275033 Google Scholar
- Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2012). Do bank characteristics influence the effect of monetary policy on bank risk? Economics Letters, 117(1), 220–222. https://doi.org/10.1016/j.econlet.2012.04.106
- Anani, M., & Owusu, F. (2023). Regulatory capital and bank risk-resilience amid the Covid-19 pandemic: How are the Basel reforms faring? Finance Research Letters, 52, 103591. https://doi.org/10.1016/j.frl.2022.103591
-
Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2008). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets Institutions and Money, 18(2), 121–136. https://doi.org/10.1016/j.intfin.2006.07.001
10.1016/j.intfin.2006.07.001 Google Scholar
- Baker, S. R., Bloom, N., & Davis, S. J. (2016). Measuring economic policy uncertainty. The Quarterly Journal of Economics, 131(4), 1593–1636. https://doi.org/10.1093/qje/qjw024
- Baum, C. F., Caglayan, M., & Ozkan, N. (2009). The second moments matter: The impact of macroeconomic uncertainty on the allocation of loanable funds. Economics Letters, 102(2), 87–89. https://doi.org/10.1016/j.econlet.2008.11.019
- Berger, A. N., & Black, L. K. (2011). Bank size, lending technologies, and small business finance. Journal of Banking & Finance, 35(3), 724–735. https://doi.org/10.1016/j.jbankfin.2010.09.004
- Berger, A. N., & Demirgüç-Kunt, A. (2021). Banking research in the time of COVID-19. Journal of Financial Stability, 57, 100939. https://doi.org/10.1016/j.jfs.2021.100939
- Berger, A. N., Miller, N. H., Petersen, M. A., Rajan, R. G., & Stein, J. C. (2005). Does function follow organizational form? Evidence from the lending practices of large and small banks. Journal of Financial Economics, 76(2), 237–269. https://doi.org/10.1016/j.jfineco.2004.06.003
- Bianco, T. (2021). Monetary policy and credit flows. Journal of Macroeconomics, 70, 103362. https://doi.org/10.1016/j.jmacro.2021.103362
- BIS. (2019). Unconventional monetary policy tools: A cross-country analysis. BIS CGFS Papers No. 63. https://www.bis.org/publ/cgfs63.pdf
-
Bitar, M., & Tarazi, A. (2022). A note on regulatory responses to COVID-19 pandemic: Balancing banks' solvency and contribution to recovery. Journal of Financial Stability, 101009, 101009. https://doi.org/10.1016/j.jfs.2022.101009
10.1016/j.jfs.2022.101009 Google Scholar
- Bonfim, D., & Soares, C. (2018). The risk-taking channel of monetary policy: Exploring all avenues. Journal of Money, Credit and Banking, 50(7), 1507–1541. https://doi.org/10.1111/jmcb.12500
- Borio, C., & Gambacorta, L. (2017). Monetary policy and bank lending in a low interest rate environment: Diminishing effectiveness? Journal of Macroeconomics, 54, 217–231. https://doi.org/10.1016/j.jmacro.2017.02.005
- Borio, C., Gambacorta, L., & Hofmann, B. (2017). The influence of monetary policy on bank profitability. International Finance, 20(1), 48–63. https://doi.org/10.1111/infi.12104
- Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal of Financial Stability, 8(4), 236–251. https://doi.org/10.1016/j.jfs.2011.12.003
- Cao, Y., & Chou, J. Y. (2022). Bank resilience over the COVID-19 crisis: The role of regulatory capital. Finance Research Letters, 48, 102891. https://doi.org/10.1016/j.frl.2022.102891
- Chen, M., Wu, J., Jeon, B. N., & Wang, R. (2017). Monetary policy and bank risk-taking: Evidence from emerging economies. Emerging Markets Review, 31, 116–140. https://doi.org/10.1016/j.ememar.2017.04.001
-
Chen, P.-F., Lee, C.-C., & Zeng, J.-H. (2019). Economic policy uncertainty and firm investment: Evidence from the U.S. market. Applied Economics, 51(31), 3423–3435. https://doi.org/10.1080/00036846.2019.1581909
10.1080/00036846.2019.1581909 Google Scholar
- Chiang, T. C. (2022). Evidence of economic policy uncertainty and COVID-19 pandemic on global stock returns. Journal of Risk and Financial Management, 15(1), 28.
- Ҫolak, G., & Öztekin, Ö. (2021). The impact of COVID-19 pandemic on bank lending around the world. Journal of Banking & Finance, 133, 106207.
- Dang, V. D. (2020). Do non-traditional banking activities reduce bank liquidity creation? Evidence from Vietnam. Research in International Business and Finance, 54, 101257. https://doi.org/10.1016/j.ribaf.2020.101257
- Dang, V. D. (2022). Bank liquidity creation under micro uncertainty: The conditioning role of income structure. Economic Modelling, 112, 105852. https://doi.org/10.1016/j.econmod.2022.105852
- Dang, V. D., & Huynh, J. (2022). Bank funding, market power, and the bank liquidity creation channel of monetary policy. Research in International Business and Finance, 59, 101531. https://doi.org/10.1016/j.ribaf.2021.101531
-
de Moraes, C. O., & de Mendonça, H. F. (2019). Bank's risk measures and monetary policy: Evidence from a large emerging economy. The North American Journal of Economics and Finance, 49, 121–132. https://doi.org/10.1016/j.najef.2019.04.002
10.1016/j.najef.2019.04.002 Google Scholar
- de Moraes, C. O., Montes, G. C., & Antunes, J. A. P. (2016). How does capital regulation react to monetary policy? New evidence on the risk-taking channel. Economic Modelling, 56, 177–186. https://doi.org/10.1016/j.econmod.2016.03.025
- Deev, O., & Plíhal, T. (2022). How to calm down the markets? The effects of COVID-19 economic policy responses on financial market uncertainty. Research in International Business and Finance, 60, 101613. https://doi.org/10.1016/j.ribaf.2022.101613
- Demir, E., & Danisman, G. O. (2021). Banking sector reactions to covid-19: The role of bank-specific factors and government policy responses. Research in International Business and Finance, 58, 101508. https://doi.org/10.1016/j.ribaf.2021.101508
- DeYoung, R., & Torna, G. (2013). Nontraditional banking activities and bank failures during the financial crisis. Journal of Financial Intermediation, 22(3), 397–421. https://doi.org/10.1016/j.jfi.2013.01.001
- Duan, Y., Ghoul, S. E., Guedhami, O., Li, H., & Li, X. (2021). Bank systemic risk around COVID-19: A cross-country analysis. Journal of Banking & Finance, 133, 106299. https://doi.org/10.1016/j.jbankfin.2021.106299
- Elnahass, M., Trinh, V. Q., & Li, T. (2021). Global banking stability in the shadow of Covid-19 outbreak. Journal of International Financial Markets Institutions and Money, 72, 101322. https://doi.org/10.1016/j.intfin.2021.101322
- Elsayed, A. H., Naifar, N., & Nasreen, S. (2022). Financial stability and monetary policy reaction: Evidence from the GCC countries. The Quarterly Review of Economics and Finance, 87, 396–405. https://doi.org/10.1016/j.qref.2022.03.003
- Fitch Solutions Inc. (2022). Bank financial data. Retrieved from fitch connect database.
- Forbes, K., Gagnon, J., & Collins, C. G. (2021). Pandemic inflation and nonlinear, global Phillips curves. Published on VOX, CEPR Policy Portal. https://voxeu.org/article/pandemic-inflation-and-nonlinear-global-phillips-curves
- Gambacorta, L., & Shin, H. S. (2018). Why bank capital matters for monetary policy. Journal of Financial Intermediation, 35, 17–29. https://doi.org/10.1016/j.jfi.2016.09.005
-
Girotti, M. (2019). How monetary policy changes bank liability structure and funding cost. Oxford Economic Papers, 73(1), 49–75. https://doi.org/10.1093/oep/gpz058
10.1093/oep/gpz058 Google Scholar
- Goodell, J. W., Goyal, A., & Urquhart, A. (2021). Uncertainty of uncertainty and firm cash holdings. Journal of Financial Stability, 56, 100922. https://doi.org/10.1016/j.jfs.2021.100922
- Guo, W. C., & Tseng, P. L. (2023). COVID-19, bank risk, and capital regulation: The aggregate shock and social distancing. The Quarterly Review of Economics and Finance, 92, 155–173. https://doi.org/10.1016/j.qref.2023.09.004
- Hale, T., Angrist, N., Goldszmidt, R., Kira, B., Petherick, A., Phillips, T., Webster, S., Cameron-Blake, E., Hallas, L., Majumdar, S., & Tatlow, H. (2021). A global panel database of pandemic policies (Oxford COVID-19 government response tracker). Nature Human Behaviour, 5, 529–538.
- Hardy, B., & Zhu, S. (2023). Covid, central banks and the bank-sovereign nexus. BIS Quarterly Review. https://www.bis.org/publ/qtrpdf/r_qt2303h.htm
- Heuvel, S. J. V.d. (2002). Does bank capital matter for monetary transmission? FRBNY Economic Policy Review, 8(1), 259–265.
- Heyden, K. J., & Heyden, T. (2021). Market reactions to the arrival and containment of COVID-19: An event study. Finance Research Letters, 38, 101745.
-
Hu, C., Shen, Z., Yu, H., & Xu, B. (2022). Uncertainty shocks and monetary policy: Evidence from the troika of China's economy. Economic Research, 35(1), 971–985. https://doi.org/10.1080/1331677X.2021.1952088
10.1080/1331677X.2021.1952088 Google Scholar
- Igan, D., Mirzaei, A., & Moore, T. (2023). Does macroprudential policy alleviate the adverse impact of COVID-19 on the resilience of banks? Journal of Banking & Finance, 147, 106419. https://doi.org/10.1016/j.jbankfin.2022.106419
- Ikeda, Y., Kerry, W., Lewrick, U., & Schmieder, C. (2021). Covid-19 and bank resilience: Where do we stand? BIS Bulletin, No. 44. https://www.bis.org/publ/bisbull44.htm
- Iyke, B. N., & Maheepala, M. M. J. D. (2022). Conventional monetary policy, COVID-19, and stock markets in emerging economies. Pacific-Basin Finance Journal, 76, 101883. https://doi.org/10.1016/j.pacfin.2022.101883
- Jiang, H., & Yuan, C. (2022). Monetary policy, capital regulation and bank risk-taking: Evidence from China. Journal of Asian Economics, 82, 101512. https://doi.org/10.1016/j.asieco.2022.101512
10.1016/j.asieco.2022.101512 Google Scholar
- Jokipii, T., & Milne, A. (2011). Bank capital buffer and risk adjustment decisions. Journal of Financial Stability, 7(3), 165–178. https://doi.org/10.1016/j.jfs.2010.02.002
- Keeley, M. C. (1990). Deposit insurance, risk, and market power in banking. The American Economic Review, 80(5), 1183–1200. https://doi.org/10.2307/2006769
- Lambert, F., & Ueda, K. (2014). The effects of unconventional monetary policies on Bank (Vol. 14, p. 1). IMF.
- Levin, A., Lin, C.-F., & James Chu, C.-S. (2002). Unit root tests in panel data: Asymptotic and finite-sample properties. Journal of Econometrics, 108(1), 1–24.
- Li, X., Feng, H., Zhao, S., & Carter, D. A. (2021). The effect of revenue diversification on bank profitability and risk during the COVID-19 pandemic. Finance Research Letters, 43, 101957. https://doi.org/10.1016/j.frl.2021.101957
- Liang, S., Moreira, F., & Lee, J. (2020). Diversification and bank stability. Economics Letters, 193, 109312. https://doi.org/10.1016/j.econlet.2020.109312
- López-Penabad, M. C., Iglesias-Casal, A., & Silva Neto, J. F. (2022). Effects of a negative interest rate policy in bank profitability and risk taking: Evidence from European banks. Research in International Business and Finance, 60, 101597.
- Lyu, Y., Zhang, X., Cao, J., Liu, J., & Yang, M. (2024). Quantitative easing and the spillover effects from the crude oil market to other financial markets: Evidence from QE1 to QE3. Journal of International Money and Finance, 140, 102989. https://doi.org/10.1016/j.jimonfin.2023.102989
- Mateev, M., Tariq, M. U., & Sahyouni, A. (2021). Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic. PLoS One, 16(6), e0253803. https://doi.org/10.1371/journal.pone.0253803
- Meslier, C., Tacneng, R., & Tarazi, A. (2014). Is bank income diversification beneficial? Evidence from an emerging economy. Journal of International Financial Markets Institutions and Money, 31, 97–126. https://doi.org/10.1016/j.intfin.2014.03.007
- Neef, Ö. D.-d., & Schandlbauer, A. (2021). COVID-19 and lending responses of European banks. Journal of Banking & Finance, 133, 106236. https://doi.org/10.1016/j.jbankfin.2021.106236
- Neuenkirch, M., & Nöckel, M. (2018). The risk-taking channel of monetary policy transmission in the euro area. Journal of Banking & Finance, 93, 71–91. https://doi.org/10.1016/j.jbankfin.2018.06.003
- Ngambou Djatche, M. J. (2019). Re-exploring the nexus between monetary policy and banks' risk-taking. Economic Modelling, 82, 294–307. https://doi.org/10.1016/j.econmod.2019.01.016
- Nguyen, T. D., Le, A. H., Thalassinos, E. I., & Trieu, L. K. (2022). The impact of the COVID-19 pandemic on economic growth and monetary policy: An analysis from the DSGE model in Vietnam. Economies, 10(7), 1–19.
- Paltrinieri, A., Dreassi, A., Rossi, S., & Khan, A. (2021). Risk-adjusted profitability and stability of Islamic and conventional banks: Does revenue diversification matter? Global Finance Journal, 50, 100517. https://doi.org/10.1016/j.gfj.2020.100517
- Phan, D. H. B., Iyke, B. N., Sharma, S. S., & Affandi, Y. (2021). Economic policy uncertainty and financial stability—Is there a relation? Economic Modelling, 94, 1018–1029. https://doi.org/10.1016/j.econmod.2020.02.042
- Quagliariello, M. (2009). Macroeconomic uncertainty and banks' lending decisions: The case of Italy. Applied Economics, 41(3), 323–336. https://doi.org/10.1080/00036840601007286
- Refinitv. (2022). DataStream macroeconomic analysis. DataStream database.
- Ritchie, H., Mathieu, E., Rodés-Guirao, L., Appel, C., Giattino, C., Ortiz-Ospina, E., Hasell, J., Macdonald, B., Dattani, S., Beltekian, D., Ortiz-Ospina, E., & Roser, M. (2020). Coronavirus Pandemic (COVID-19). https://ourworldindata.org/coronavirus
-
Ryuichi, N., & Hirofumi, U. (2011). Herd behaviour by Japanese banks after financial deregulation. Economica, 78(312), 618–636. https://doi.org/10.1111/j.1468-0335.2010.00870.x
10.1111/j.1468-0335.2010.00870.x Google Scholar
- Shrieves, R. E., & Dahl, D. (1992). The relationship between risk and capital in commercial banks. Journal of Banking & Finance, 16(2), 439–457. https://doi.org/10.1016/0378-4266(92)90024-T
-
Soedarmono, W., Machrouh, F., & Tarazi, A. (2011). Bank market power, economic growth and financial stability: Evidence from Asian banks. Journal of Asian Economics, 22(6), 460–470. https://doi.org/10.1016/j.asieco.2011.08.003
10.1016/j.asieco.2011.08.003 Google Scholar
- Spiegel, M. M. (2022). Monetary policy spillovers under COVID-19: Evidence from lending by U.S. foreign bank subsidiaries. Journal of International Money and Finance, 122, 102550. https://doi.org/10.1016/j.jimonfin.2021.102550
- Stolz, S., & Wedow, M. (2011). Banks' regulatory capital buffer and the business cycle: Evidence for Germany. Journal of Financial Stability, 7(2), 98–110. https://doi.org/10.1016/j.jfs.2009.09.001
- Toh, M. Y., Gan, C., & Li, Z. (2020). Bank diversification, competition and liquidity creation: Evidence from Malaysian banks. The Singapore Economic Review, 65(4), 1127–1156. https://doi.org/10.1142/S0217590819500103
- Toh, M. Y., & Zhang, Y. (2022). Bank capital and risk adjustment responses to economic uncertainty: Evidence from emerging southeast Asian economies. Research in International Business and Finance, 60, 101576. https://doi.org/10.1016/j.ribaf.2021.101576
- Tran, D. V., Hassan, M. K., Alam, A. W., & Dau, N. (2022). Banks' financial soundness during the COVID-19 pandemic. Journal of Economics and Finance, 46(4), 713–735. https://doi.org/10.1007/s12197-022-09591-x
- Valencia, F. (2016). Bank capital and uncertainty. Journal of Banking and Finance, 69(S1), S1–S9. https://doi.org/10.1016/j.jbankfin.2015.06.010
- Valencia, O. C., & Bolaños, A. O. (2018). Bank capital buffers around the world: Cyclical patterns and the effect of market power. Journal of Financial Stability, 38, 119–131. https://doi.org/10.1016/j.jfs.2018.02.004
- Wei, X., & Han, L. (2021). The impact of COVID-19 pandemic on transmission of monetary policy to financial markets. International Review of Financial Analysis, 74, 101705. https://doi.org/10.1016/j.irfa.2021.101705
- Williams, B., & Rajaguru, G. (2022). The evolution of bank revenue and risk in the Asia-Pacific region. Pacific-Basin Finance Journal, 71, 101693. https://doi.org/10.1016/j.pacfin.2021.101693
- World Bank. (2022). World development indicators. https://databank.worldbank.org/source/world-development-indicators
- Wu, J., Yan, Y., Chen, M., & Jeon, B. N. (2022). Monetary policy, economic uncertainty and bank risk: Cross-country evidence. Journal of International Money and Finance, 122, 102580. https://doi.org/10.1016/j.jimonfin.2021.102580
- Wu, J., Yao, Y., Chen, M., & Nam Jeon, B. (2020). Economic uncertainty and bank risk: Evidence from emerging economies. Journal of International Financial Markets Institutions and Money, 68, 101242. https://doi.org/10.1016/j.intfin.2020.101242
- Yaman, H., Omar, A., Azlan, A., & Hafezali, I. H. (2018). Determinants of ex-post and ex-ante credit risk: A novel panel analysis and comparative evidence from foreign and local Malaysian banks. Journal of Economic & Management Perspectives, 12(1), 98–128.
- Yilmazkuday, H. (2022). COVID-19 and monetary policy with zero bounds: A cross-country investigation. Finance Research Letters, 44, 102103.
