The Impact Of Interest Rate Liberalization On Commercial Banks And Its Solutions

As the price of money, interest plays an important role on the financial market, whose variation represents the supply and demand of money. It leads the resource to the most efficient apartment. The concept of financial liberalization emerged in the80s, which pushed many countries to begin with interest rate liberalization. China hadn’t actually begun until1996. After a few years of trying, we have reached the goal:set upper limit to the deposit rate and lower limit to the loan rate. People’s bank of china, on June7th,2012, announced that it is allowed to raise the deposit rate to the1.1times basic rate. It made everybody focus on interest rate liberalization again.The commercial bank in China had a harvest in2011. The net profit reached as high as2650billion, setting a new record. We are all pleased to witness this high speed of development, meanwhile, we have to discover what’s behind this. It’s the finance monopoly, the dependency of commercial bank to the traditional way of making profit and the bad condition of city commercial bank.According the experience of other countries like the USA, bank crisis did happen after the interest rate liberalization. It’s the best evidence to prove that the reform will squeeze the profit of commercial bank.So this paper aims at the opportunity and risks that banks will face after the reform. And how will they deal with all of these.First of all, the paper introduced the concept of "interest rate liberalization", reviewed related theories like the max’s and the "liquid preference theory". And the most important of all, the "theory of financial repression and deepening" by Mckinnon and Shawn. It emphasizes the importance of the reform and it believes that the interest rate should be decided by the market.Then we reviewed researches about the interest rate liberalization and its effect on commercial banks, both abroad and domestic. It is almost like an agreement that reform is necessary, however, risks it brings in should not be neglected.The3th chapter is mainly about experiences from5countries. The USA is the first example we mentioned. The process of its reform lasted about more than ten years, not fast comparing with the other developed countries. Also, it kink of put a lot of small banks in danger. The bank of Japan lost control after the reform, aiming at the high profit, which brought Japan to the depression of ten years. Then it’s Korea and Thailand. In the end, we introduced the process of china’s reform. And what’s important is the transform of commercial banks while the interest rate liberalization.Next, we described the opportunities the reform brought to commercial banks. Firstly, it granted banks the right to run business on their own. Secondly, it pushed financial innovation. And, it strikes the "underground finance".The next two chapters is the very point of this paper. It explicitly described the risk that commercial banks will confront and did some empirical research. The risks include:fierce competition, credit risk, and the most important, interest rate risk. Then it comes to the classification of the interest risk and how to measure the risk. We used the sensitive gap method to calculate the repricing risk, based on12commercial banks. The results suggest that banks mostly face the negative gap, so the risk rises when the interest goes up. Then we use the panel data to analyze the basis risk, based on21banks, from2005to2010. The result shows that the benchmark decides the pricing of commercial banks. That is to say they confront with a high basis risk. Meanwhile, the city commercial bank faces higher risk than nationalized banks, through the subsample.At last, we come up with our own ideas on how to deal with the risk. Firstly, improve the pricing ability, and encourage financial innovation; secondly, transform the pattern of making profit. It means focus on the financing market of small company and develop the off-balance business; Thirdly, build a system to manage the interest rate risk; at last, as for the city commercial bank, to enhance the cooperation, maybe acquisition can be a good solution for the development.