Interest Rate Liberalization,Risk,Financial Innovation And Credit Discrimination:A Fixed Effect Analysis

Interest rate liberalization is an essential progress for a country's economic development.Starting from 1994,liberalization of interest rate helps China to grow in a remarkable pace.In 2015 China cancel the upper limit for saving interest rate.While liberalization of interest rate deepens,it challenges commercial banks with unprecedented problems.Interest rate liberalization narrows cost of carry and causes interest rate fluctuation from worldwide perspective,which makes commercial banks encounter more problems in traditional credit service,such as managerial uncertainty and competitive pressure.Commercial banks suffer from these kinds of problems may result in bankruptcy and exposure of interest rate risk.Small and medium-sized commercial banks,unlike large commercial banks,have some issues in size of assets,competitiveness,intermediate business,managerial abilities.These issues could be worse as liberalization of interest rate goes on.In the meantime,empirical examples from America and Japan interest rate liberalization suggest that financial innovation can be a breakthrough point and a catalyst.Financial innovation smoothens and guarantees the progress of liberalization of interest rate,while liberalization of interest rate could also push commercial banks to innovate.Thus,relationship between interest rate liberalization and financial innovation is interdependent.In addition,the key to interest rate liberalization is about capital price which determined by free market.Level of interest rate could reveal capital demand both from supply and demand perspective,and decrease limits of financing,eliminate "credit discrimination",and increase production efficiency.The panel data collected from 104 commercial banks for the period of 2008 to 2016 shows four empirical analysis results.First,China's interest rate liberalization has intensified the bankruptcy risk of commercial Banks,especially for small and medium-sized commercial Banks.Second,large commercial banks suffer less from interest rate liberalization with their "too big to fail" scale effect,while expansion does not alleviate the risk of bankruptcy for small and medium-sized commercial banks.Financial innovation is the fundamental way to reduce bankruptcy risk of commercial banks and to enhance their sustainable competitive advantages.Third,interest rate liberalization will motivate commercial banks to innovate,motivation for small and medium-sized commercial banks is weaker than big ones.Idling within interbank funding can restrain the financial innovation,deteriorate the foundation of commercial banks' development.Fourth,loan interest rate liberalization strengthens "credit discrimination" effectively instead of eliminating it.Implication for the results is that reform for interest rate liberalization should be further developed,position for small and medium-sized commercial Banks needs to be further clarified.To testify research results,this paper examines robustness test by changing method of variable measurement,the result of robustness verified above conclusion.This paper has two innovative points:1)research view,relationship between interest rate liberalization and financial innovation of commercial banks draw few attentions in previous studies.There are no empirical tests yet for the elimination of "credit discrimination" but theoretical models.This paper fills the blank for this area.2)research data,most commercial banks in this paper are not public listed while majority of previous studies focused more on public listed commercial banks,which allows this paper to analyze from much more microeconomic-based view.