Research On The Transformation Of Chinese Commercial Banks' Profit Model With The Interest Rate Liberalization

At the end of 2015,the People' s Bank of China(PBC)has no restriction on deposit and loan rates and the reform of interest rate liberalization has almost accomplished.The reform of interest rate liberalization has profound influence on economy and financial system,especially impacts the profit model of commercial banks.The PBC announced to adopt the MPA(Macro Prudential Assessment)to stabilize the financial system.The core of MPA is to assess and supervise the assets and liabilities configuration and interest rate pricing of commercial banks in interest rate liberalization.It' s necessary to research the profit model transformation of commercial banks of interest rate liberalization since the sustainable profitability of commercial banks will affect the long-term stability of financial system and it' s impossible to simply rely on scope expansion to realize the profit goal.This paper will analyze the influence mechanism of interest rate liberalization on the profit model transformation of commercial banks,and empirically analyze the impact effect on profit model of commercial banks of interest rate liberalization,assets and liabilities configuration and the influence on profitability of diversification of banks.Besides,this paper will come up with suggestion on profit model transformation of commercial banks according to existing international examples.Based on systematic analysis of related theory of interest rate liberalization and profit model transformation of commercial banks,this paper will further research the effect on profit model transformation of commercial banks of interest rate liberalization from macro transmission mechanism and micro action mechanism perspectives.From macro transmission mechanism aspect,interest rate liberalization as one of macro monetary policies,affects capital supply and demand of meso financial system through interest rate level which causes the change of investment and financing activity of micro enterprises.From micro action mechanism aspect,it mainly affects the profitability of commercial banks through pricing mechanism and risk mechanism to influence the operation of commercial banks which will optimize the assets and liabilities structure and business structure dynamically to accomplish the transmission of profit model.The interest rate liberalization in China is a gradual reform which is a step by step institutional change process.To quantitatively describe the process of interest rate liberalization,the paper comes up with a measurement approach based the analysis of policies and measures.This approach builds index system of the measurement of interest rate liberalization from deposit-loan rates,monetary market rates,bond market rates and wealth management products' yields according to the facts of interest rate reform and bank industry in China.And it utilizes analytic hierarchy process to build IRLI(Interest Rate Liberalization Index)as quantitative index of process of interest rate liberalization to dynamically reflect the process of reform.The interest margin model,which is the major profit model of commercial banks in China,is mainly impacted in the process of interest rate liberalization.The traditional H-S model(Model of Dealership)does not fit the situation in China since it' s based the hypothesis of fully interest rate liberalization.This paper improves the H-S model by taking the IRLI into the spread-driven theory model and adding the quadratic term of IRLI into empirical model to test the pricing mechanism of influence of profit model.Empirical results show that interest rate liberalization affects the margin of commercial banks but the relation between margin and interest rate liberalization is not linear.The margin is showing up an inverted 'U' curve,which widens at the start of interest rate liberalization and later narrows gradually.This trend is relatively obvious for small and medium-sized banks.Facing the impact of interest rate liberalization,commercial banks firstly need to optimize the assets liabilities configuration structure.This paper extends the Moniti-Klein model to four kinds of assets including excess reserve asset,securities asset,loan asset and inter-bank asset and three kinds of liabilities which include deposit,inter-bank borrowing and issued debt.Using this extended model to analyze the assets liabilities configuration and the influence of profitability of commercial banks will help verify the action mechanism of impelling profit model transformation of interest rate liberalization.Regression results of panel data shows that the optimization of assets liabilities configuration of commercial banks improves the profitability at some extend that higher ratio of loan assets,especially the ratio of retail loan assets,will be more helpful on improving profitability.But the liability configuration doesn' t have great effect on the profitability of commercial banks.Diversification is another important approach for profit model transformation of commercial banks.According to the diversification analysis frame based on the ICP(Institution,Conduct and Performance)rule,this paper will theoretically analyze and practically test the relations among interest rate liberalization,diversification and profitability of commercial banks based on the analysis of current state of diversification of commercial banks.This paper will take the interaction of interest rate liberalization and diversification into account and introduce the quadratic term of the degree of diversification to build non-linear regression model.Empirical results show that the reform of interest rate liberalization impels the diversification of commercial banks and income diversification helps banks to improve profitability.However,establishing subsidiaries is a double-sword to improving profitability that the number of subsidiaries exceeding some amount will harm the profitability improving.Based on empirical research results and existing international experience of bank industries in USA,Japan and Korea,this paper will come up with suggestion on the direction and approach of profit model transformation of commercial banks in China that different types of banks should put them in the right role and choose differential directions of transformation according to their own advantages.And commercial banks should take concrete actions from aspects like optimizing assets liabilities configuration,reinforcing synthesized business cooperation and building a mechanism of pricing management.