The Impact of China's Monetary Policy on Bank Profitability: Empirical Study Based on Panel VAR Model

It is significant for the construction of regulatory framework of financial stability to study the link between monetary policies and the profitability of commercial banks. In this paper, we apply the model of vector autoregression (VAR) to panel data of 17 commercial banks in China from 2000 to 2014 to study the dynamic relationship between monetary policy and bank profitability. By using the impulse-response functions we observe that the deposit reserve ratio shows a significant negative response to a shock in both interest income (NIM) and return on average asset (ROAA) of banks, and the response of ROAA has a small lag. The issuance of central bank hills increases in positive response to both NIM and ROAA in the short term, hut the effects are relatively small. The results of variance decomposition show that the variation of monetary policy variables such as deposit reserves and open market operations has a limited impact on the volatility of bank profitability. In conclusion, China's monetary policies have a certain effect on the profitability of commercial banks. However, the impact of the deposit reserve ratio on bank profitability is much larger than the issuance of central bank bills on that.