| Since the deposit interest rate lower limit and loan interest rate cap canceled in 2004, compression benchmark deposit and lending spreads became the main way of promoting China’s market-oriented interest rate reform. The constant shrinking of official benchmark interest rate differentials, have a significant impact on the traditional deposit and lending business of China’s banking sector, and is changing the business model of commercial banks in the kernel. Many commercial banks are turning to devebp the non-interest income as a new development strategy, to protect their existing competitive position. However, there are intricate relationships between non-interest income and the traditional net interest income, and the different kinds of combination of them have influence in returns and risk of commercial banks which is unknown These problems have not been well explained in the existing research.Based on the background of market-oriented interest rate reform, this paper analyzed and summarized the related research at home and abroad, and designed a net interest margin determinants model which conforms to the current situation of China. Using that model, the paper explored the impact of market-oriented interest rate reform and other factors on net interest margin. Next, this paper established an investment portfolio model to explore the impact of net interest income and non-interest income on bank’s risk adjusted returns. This model also provided a pair of optimal weight of both incomes. In the empirical part, this paper analyzed the data from 2007 to 2013 of 163 commercial banks in China by designing a panel data model which included a policy dummy variable standing for the interest rate market-oriented reform and a share variable of non-interest income. And then, based on the investment portfolio model, this paper set up a econometric model to analyze the impact of net interest income and non-interest income on bank’s risk and returns.On conclusion, the market-oriented interest rate reform significantly reduced the net interest margin of commercial banks, and changed its constitution of determinants. At the same time, the reform not only reduced the profitability of commercial banks, but increased the risk. Devebpment of non-interest income will help ease the impact of interest rate reform on the net interest margin and bank’s overall profitability, but this effect is just limited in the period when reform policies played a role. The share of non-interest income and net interest margin changes inversely, and a high level of non-interest income share benefited for the overall performance of commercial banks. But non-interest income has high volatility which makes commercial banks fece higher risk. After the completion of market-oriented reform of interest rates, the risk of deposit and loanbusiness level will rise, and the risk characteristics of net interest margin will be changed, as a result, the volatility of net interest income will be increased. In this case, if banks develop the net interest income and non-interest income to the optimal proportion, they will diversify risk significantly and get optimal risk-return trade-off.China’s commercial banks should focus on improving the management of interest rate risk and credit risk, to strengthen the competitiveness in the market of deposits and loans. Under the premise of focusing on risk management, promote financial innovation and increase the share of non-interest income. Finally, on the basis of net interest income and non-interest income have been well developed, commercial banks in China should effort to achieve the optimal mix ratio of the two, in order to get the optimal risk-return trade-off. |
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