The Analysis Of Loan Pricing Differences Between Banks

With the reforms of market economy speeding up, China should steadily promote the interest rate liberalization. The central bank announced the floating range of upper limit of the financial institutions deposit rate was adjusted to1.1times the benchmark interest rate on July6,2012, indicating the breakthrough of the relatively strict control of deposit rate for a long time. Then the central bank decided to cancel that the floating range of the lower limit of lending rates could be adjusted to0.7times the benchmark interest rate on July20,2013, which means comprehensive deregulation of lending rate control. As a result financial institutions could independently determine the lending interest rate according to the business principle. Thus the banks have the rights to set the lending interest rate self-governed and the deposit rate restrained, directly affecting the level of net interest margin. Net interest margin refers to the net interest income expressed as a percentage of earning assets, which could be affected by other factors, such as the average operating costs, the opportunity cost of reserve assets, the degree of bank’s diversification and so on. For a long time, net interest margins of China’s bank mainly rely on the gap of savings and loan under the control of central bank, resulting in the low pricing power. With the rapid progress of China marketization of interest rate, it is necessary to study the determinants of commercial bank’s net interest margin. It should be pointed out that the differences of organizational structure, network coverage, prospective borrower caused by the bank assets ultimately reflected in the pricing behavior differences between large and small banks.Based on the agent model proposed by Ho and Saunders in1981and its augments by other scholars introducing the monetary policy variables, this paper uses traditional panel regression model and panel smooth transition regression model to study the determinant factors of China’s bank net interest margin. The sample contains the balance panel data of our country78commercial banks in2007-2011. Firstly, the results of full sample confirm that the determinant factors of net interest margin include average operating costs, credit risk, opportunity costs of reserve assets, business diversification and statutory deposit reserve rate. Secondly, based on the assumption that banks’difference could lead to the different loan pricing strategy, the banks in the sample are divided into small and large banks according to the information of bank assets. Then this paper analyzes the two sub-samples using corresponding empirical model. The finding reveals the sensitivity of average operating costs is more higher in large banks. On the other band, both the opportunity cost of reserve assets and legal deposit reserve rate have no effect on the net interest margin in large banks while they have significant positive effect on the net interest margin in small banks. This also isupports that existence of the difference of loan pricing strategy between small and large banks, implying that the change of regression coefficients can be clearly distinguished among two samples.The method above assumes that the two samples of explanatory variables impact on net interest margins are linear, meaning that there is a structural break at the division standard. However, the change of the coefficient is often a smooth transition in the real economy. In order to better describe the data characteristics, according to the information of the data itself by the endogenous groping, this paper selects assets size as the translating variable in order to examine the nonlinear relationship between fundamental factors and net interest margin with the changes of assets, utilizing the panel smooth transition regression model. The dynamic changes of regression coefficient could reflect the differences of pricing behavior between different size banks. The results indicate that there exists nonlinear characteristics of fundamental factors’ effects on net interest margin, including average operating costs, legal deposit-reserve ratio, diversification and the opportunity cost of reserve assets.Specifically, the average operating costs’effect on net interest margin gradually increases, while both opportunity cost of reserve assets and legal deposit reserve rate’sensitivity to net interest margin gradually weakened with scale expansion. In addition, the smaller bank assets, business diversification’ effect on net interest margin becomes more obvious. In this paper, the analysis of net interest margin firstly introduced panel smooth transition regression model, the nonlinear changes of the basic variables’ regression coefficient as a result of the change of banks assets could reflect the differences between different size banks. In the end this paper puts forward the corresponding policy suggestions.This paper has four chapters and structured as follows. The first part is the introduction, containing research backgrounds, research significance, literature review about the determinants of net interest margin and the application of the panel smoothing transition regression model. Then it states the main research contents, innovation and deficiency of this article. The second part states the loan pricing differences based on panel regression analysis. Including the briefly describes of fixed effect model, the selection of variables, data description and empirical analysis. The sample is divided into different size samples according to the prior information. The differences of regression coefficient between different size banks could reflect the difference of loan pricing. The third part indicates the difference of loan pricing based on the panel smooth transition regression model. The purpose of this part is to examine the nonlinear characteristics of regression coefficients due to changes of asset size.The fourth part states the policy recommendations and conclusion.