The Empirical Study On The Determinants Of Net Interest Margin In The Chinese Banking System

Net interest margin in banking is defined as the ratio of the net interest income and the interest-earning assets or total assets, it reflects the level of the management and profitability in banks, and is the result of pricing behavior in the process of banking transactions. The level and influencing factors of net interest margin are quite different due to the difference of financial conditions and interest policy in various countries. Because of the separate operation in Chinese banking, the limited development of financial innovation and mid-business, net interest margin is the main source of profit. With the reform of interest rate liberalization, commercial banks can have a certain degree of floating in deposit rate and lending rate based on the operation of their own. But the ability of independent pricing has not been realized fully. At the same time, with the appearance of foreign banks, small joint-equity banks and city commercial banks, the financial environment facing by Chinese banking has been changed. Therefore, it is important to study the determinants of net interest margin under the new environment.This paper analyzes the level of net interest margin in Chinese banking using the structural model since the reform of interest rate liberalization. On this basis, this paper analyzes the determinants of net interest margin in Chinese banking system over the period 2000-2008, corresponding to 23 commercial banks, considering operating cost, non-interest income, non-traditional assets and regulated interest rate. Besides that, this paper tries to study the difference of the determinants of net interest margin among different banks using the static panel data estimation, corresponding to 15 listed banks and 26 non-listed banks.The results show that, the level of net interest margin in the four major state-owned banks is low and steady, but it is high and the most unstable in the city commercial banks. The determinants of the net interest margin factors include risk aversion, operating cost, credit risk, non-interest income, non-traditional assets, benchmark interest and the last net interest margin. The empirical results in opportunity cost of reserves and asset scale are different in two models. The operating cost is negatively related to net interest margin, which is different from previous research findings. Other influencing factors are positive correlation with net interest margin, indicating that the financial innovation can determine the net interest margin and the influence in the policy of interest rate in China is great. Meanwhile, the influence in risk aversion, operating cost, non-interest income and non-traditional assets is different between listed banks and non-listed banks. Based on the analysis, this paper suggest that Chinese commercial banks should strive to maintain a reasonable level of net interest margin, and further to enhance the ability of the independent pricing.