Research On The Impacts Of Interest Rate Liberalization On China's Commercial Banks' Interest Margin

Interest rate liberalization is the core of China's financial reform.Since the People's Bank of China liberalized inter-bank offered rate as the beginning of China's "gradual" interest rate liberalization in 1996,it has gone through nearly 20 years.At present,in addition to the deposit rate ceiling being controlled,all interest rates have been fully liberalized.Since November 2014,the PBOC has expanded the rising space of deposit rate for three times,the interest rate liberalization of deposit is also about to be completed.Most people think that China's commercial banks' interest margin will tend to narrow after the interest rate liberalization is finished,but whether it is right and why it will narrow is still worth exploring.A lot of scholars came to the conclusion by refering to the experience of countries that have realized the interest rate liberalization,but ignored the differences in macroeconomic conditions and financial market system,thus simply using foreign experiences to explain the situation in China lacks theoretical basis.Currently,although the domestic and foreign academic circles have done a lot of researches on the issues of interest rate liberalization and the factors influencing interest margin of commercial banks,but literature that specializes in the reseacrh on the impacts of interest rate liberalization on commercial banks' interest margin remains relatively rare,especially in the influencing mechanism.This paper systematically explore the impacts of interest rate liberalization on commercial banks' interest margin,from foreign experience to the domestic situation,from testing the past facts to judging the future case,from theoretical models to empirical research.Firstly,this paper summarizes the foreign experiences of interest rate liberalization after introducing the theory of financial repression and the theory of financial deepening.We find that,the impacts of interest rate liberalization on the financial system and commercial banks of these countries include:the benchmark interest rate determined by the monetary authorities gradually played a more important role and the monetary policy shifted from direct and quantitative to indirect and price-based;in the long term,banks' interest margin gradually narrowed to be stable;commercial banks raised their risk tolerance and changed their loan structure;the proportion of bank's non-interest income rose.Then,this paper analyzes the variation trend of China's commercial banks' interest margin between 2003 and 2014 and finds an interesting phenomenon that despite the reform of interest rate liberalization is deepening,the interest margin of China's commercial banks did not significantly narrowed,but remained steady.This paper believes it is mainly due to the deposit rate hasn't been liberalized,so that commercial banks are still able to maintain a low cost of capital which bringing an interim high interest margin.After that,in order to verify whether the reform of interest rate liberalization had an impact on China's commercial banks' interest margin,this paper uses the panel data of 16 listed banks from the second quarter of 2010 to the first quarter of 2015 to empirically test the impact of two policies of interest rate liberalization in June and July 2012 and in July 2013 by setting the dummy variable.The results show that the reform measures of expanding the floating space of deposit rate ceiling and lending rate floor did have a negative impact on banks' interest margin,but did not cause it to narrow significantly.Finally,in order to investigate what will happen to China's commercial banks' interest margin after the deposit rate ceiling is liberalized,on the basis of Western classical theory of interest rate determination,this paper build an interest rate decision model of China's commercial banks under realistic conditions with deposit rate ceiling being controlled and lending rate being liberalized to analyze the current supply and demand of funds in the banking system,and then derive what will happen to China's commercial banks,deposit rate,lending rate and interest margin after the deposit rate ceiling is liberalized.Meanwhile this paper also analyzes the impacts of the rising of money fund due to the internet finance products represented by Yu E Bao,the expanding of direct financing system and the adjusting of loan structure by commercial banks on banks' deposit rate,lending rate and interest margin.The theoretical results show that in the short term,given the the credit needs of the real economy and the loan structure of commercial banks,the liberalization of deposit rate ceiling will cause deposit rate to rise,lending rate to fall due to the increase of loanable funds and interest margin to narrow.In the long run,considering that the rising of money fund will push up the cost of bank funds and the expanding of direct financing system will lower lending rate,the interest margin may narrow further,however,with commercial banks' initiative to adjust the loan structure and increase high-income asset allocation,lending rate may rise.So,with the the deposit rate ceiling being liberalized,there is a high probability that China's commercial banks' interest margin will narrow periodicity until the banks successfully adjusted its business structure.