| The level of banking interest margins is an important indicator of the efficiency of a country's banking industry, and the interest margins is the main source of profit for banks. As the reform of interest rates liberalization deepening, commercial banks in China enjoy more and more independence in determining interest rates. At present, although the benchmark interest rates of commercial banks are determined by the central bank, commercial banks have relative large independence in setting lending rates. A commercial bank can choose suitable interest margins based on its own property conditions as well as the customer credit status in order to increase profit.Building upon the existing international literature about the determination of banking interest margins, this paper proposes a modified model of banking interest margins under interest rate regulations. Furthermore, a sample of 14 commercial banks from 1999 to 2009 is chosen and econometric tools such as dynamic panel method are employed to study the determining factors of the interest margins among Chinese commercial banks. Based on these results, the paper puts forward policy proposals for China's interest rates liberalization reform and increasing the interest margins of commercial banks.This paper's primary structure arrangement is as follows:The first part is an introduction. It introduces the independent decision-making conditions on lending rate of China's commercial banks under interest rate regulation. And it emphasizes the importance of studying the determining factors of banking interest margins.The second part is a summary of domestic and international literature about the determining factors of commercial banking interest rate spreads. It reviews the main theoretical and empirical results and latest research developments in this field.The third part proposes a theoretical model for the determination of commercial banking interest rate spreads. Starting from Ho and Saunders(1981)'s classic model of spread determination, this part offers a modified model of spread determination under interest rate regulations. The fourth part offers multi-dimensional measures of banking interest rate spreads and a theoretical exposition. This interest spread can be defined either as the spread between deposit and lending rates, or the accounting spread. This part also conducts theoretical analysis of potential factors determining interest rate spreads.The fifth part and the sixth part are empirical analysis of determining factors of interest rate spread. The fifth part describes the changing trend of China's commercial banking interest rates and accounting spreads in the past ten years and compare the conditions between state-owned banks and the joint-stock banks. In the sixth part, we carry out regression analysis to analyze determining factors of interest rate spreads for the whole sample, and two subsamples of state-owned banks and joint-stock banks.The seventh part includes conclusion and policy suggestions. It is found that the interest rate spread has some inertia. The spread's determining factors mainly includes internal factors reflecting a bank's own conditions such as credit risks, fluid risk, assets structure and bank size. On the other hand, external macro-economic conditions influencing the spread include GDP growth rate, CPI, the ration of M2 to GDP. It is found that there are large differences in determining factors of interest rate spreads between the state-owned banks and the joint-stock banks.In summary, this paper studies determining factors of China's commercial banking interest rate spreads, analyzes the present situation of commercial bank's independent lending decision and conducts theoretical and empirical analysis for the determination of interest rate spreads. It provides evidences for setting reasonable spreads, puts forward corresponding policy proposals, and points out that the interest rates liberalization reform should further deepen. |
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