Research On Bank Liquidity Creation Under The Two-pillar Regulatory Framework

Since the post-crisis era,a series of large and small crises and disturbances mostly occurred in the financial field,including the credit strains,bills crises and money shortages caused by regulatory tightening,the high leverage problem and capital market bubble caused by blockage of monetary transmission,the high systemic risks pushed up by the shadow banking growing rapidly through bypassing regulation,and a series of unstable factors such as small and medium sized enterprises’ equity pledge crisis and bond default.Exposing many realistic problems,such as the disunity of economic and financial cycles,the blockage of transmission from monetary policy to the real economy,the insufficiency of interest rate liberalization,the lack of coordination between the monetary and regulatory pillars,etc.Behind a series of financial chaos is the relationship between financial stability and economic development.In 2017,the report to the 19 th National Congress of the Communist Party of China proposed the establishment of a "two-pillar" macro coordination framework,for the first time,financial stability has been identified as an important goal of macroeconomic development,emphasizing the coordination between monetary policy and macro-prudential supervision,aiming to effectively resolve the inherent contradiction between financial stability and economic development and form a long-term mechanism for sustained and sound development.This paper analyzes the liquidity creation of banks in the context of the dual-pillar policy framework,and deeply analyze the influencing factors and mutual relations of liquidity creation under the dual-pillar policy framework,combining with the mutually reinforcing mechanism of "risk taking-liquidity creation".Firstly,it analyzes how monetary policy affects liquidity creation in direct and indirect ways by using risk taking as the intermediary variable under the pillar of monetary policy.Secondly,under the new monetary policy framework of "interest rate corridor",a semi-parametric nonlinear model is established to discuss its non-linear influence on liquidity creation incorporating forward looking Taylor rule interest rates.Thirdly,establishing a three-variable system of monetary policy,risk-taking and liquidity creation,analyzing the dynamic time-varying characteristics and shock response effects of monetary policy on liquidity creation based on the parametric time-varying model of random fluctuations（TVP-SV-VAR）.Fourthly,regarding the introduction of deposit insurance system as a quasi-natural experiment to analyze the policy effect of major changes in the regulatory system under the pillar of macro-prudential supervision on bank liquidity creation,and further test the multiplier effect and the mediating effect of "risk-taking-liquidity creation".Fifthly,designing and calculating the macro-prudential regulation index,establishing relevant econometric models to test the possible conflicts and connections between macro-prudential regulation policies and monetary policies’ impact on liquidity creation.Finally,the paper puts forward the policy suggestions of liquidity supervision and dual-pillar regulation on the basis of the above.This paper includes seven chapters,and the specific arrangement is as follows:Chapter one,introduction.Expounding the background and significance of the topic selection,sorting out and defining the relevant concepts,introducing the research methods,ideas,structural framework and technical route of the paper,and putting forward the possible innovation points and research limitations.Chapter two,literature review,introducing and reviewing the main theoretical literatures related to the research.Chapter three studies the liquidity creation and its transmission path under the monetary pillar and further discusses the transmission mechanism under the interest rate corridor.Chapter four studies the time-varying characteristics of monetary policy’s influence on liquidity creation under monetary pillar.Chapter five takes the quasi-natural experiment of deposit insurance as an example to study the liquidity creation under the pillar of macroprudential regulation.Chapter six studies the relationship and influence mechanism of monetary policy,macro-prudential regulation and liquidity creation.Chapter seven is the conclusion,policy recommendations and the prospect of future research.The main findings of this paper are as follows: Firstly,the transmission mechanism of "monetary policy-risk taking-liquidity creation" significantly exists under the pillar of monetary policy,with both on-balance sheet and off-balance sheet influences.It is not only significant under the framework of static analysis,but also still holds in the case of dynamic and random fluctuations.Secondly,considering the nonlinear effect of the interest rate corridor,the above mechanism is also effective.Thirdly,changes in regulatory policies under the pillar of macro-prudential supervision will also have an impact on liquidity creation.For example,the introduction of deposit insurance will inhibit the liquidity creation of commercial banks,especially those banks with low capital adequacy ratio,high loan ratio and small capital scale,which will be more sensitive to the changes.In addition,the influence of monetary policy on liquidity creation also exists under the supervision pillar.Fourthly,under the dual-pillar scenario,the strengthening of macro-prudential supervision inhibits liquidity creation to some extent,and the probability of banks’ good performance in monetary policy transmission effect will also decrease.However,the impact of monetary policy on liquidity creation is more pronounced than that of macro-prudential regulation,which has a limited role in offsetting the impact of monetary policy on liquidity creation.The above findings reveal the laws and characteristics of bank liquidity creation under the dual-pillar framework,which is of reference significance to the construction of China’s "dual-pillar" policy framework.