The bank balance sheet management revisited: Lending vs. securities investment

This paper examines how Chinese banks allocate assets between loans and securities under different macro-financial and regulatory conditions. Using panel data for 42 listed banks from 2010 to 2023, we classify securities holdings into government bonds, corporate bonds, and securities issued by, or linked to, financial institutions (FIS). We find that higher inflation is associated with larger loan shares and smaller securities shares. In contrast, higher interbank rates are associated with lower loan shares and higher securities shares, particularly FIS. Regulatory indicators are also related to portfolio composition: higher reserve ratios are associated with smaller securities shares, while higher capital ratios are associated with lower FIS shares within securities portfolios. Overall, the findings suggest that the relative allocation between loans and securities and the composition of securities holdings vary systematically with macro-financial conditions and regulatory constraints. The results are consistent with the balance-sheet reallocation mechanisms underlying the bank balance sheet channel of monetary policy, thus highlighting the importance of monitoring banks’ securities composition, particularly exposure to FIS.