The Interest Rates Liberalization’s Impact On The Net Interest Margins Of China Commercial Banks

Firstly, this paper analyzes the development of China’s marketable interest rate reform. Then, taking as reference the seminal work by Ho and Saunders(1981) and subsequent extensions by Maudos and Solis(2009), our study models the net interest margin simultaneously including operating costs and diversification and specialization as determinants of the margin. Based on the theoretical analysis,the study establishes a comprehensive regression model that introduces the variables should be considered but hasn’t appeared in the mathematical model.Moreover,the empirical research is conducted based on the China’s listed commercial banks.The static and dynamic models referring to China case show that its margins can be explained mainly by the market power, average operating costs, benchmark interest rates, the degree of risk aversion, Credit risk, Market risk. Transaction size and GDP growth.The income from non-traditional activities and the loan loss provisions/loans has significantly negative effect on the net interest margin.The dynamic regression documents the evidence that the net interest margin and that in the preceding period show significantly positive relationship.Among them, the impact on net interest margin of the biggest variables are: changes in the benchmark interest differential, market forces, the average operating costs; Intermediate business, financing system variable differential impact on net interest showed an increasing trend; the degree of risk aversion, interest rate risk, credit risk, the impact of changes in benchmark spread of net interest margin showed a decreasing trend.Result of this study reflects the impact from different angles interest rate marketization reform of commercial banks net interest margin. Firstly, net interest margin in the initial interest rate reform presents the trend of expansion, but with the deepening of the reform, the net interest margin is in constant smaller; Secondly, the financing system was first introduced in the empirical model variables and net interest margin showed a strong correlation demonstrates the impact of interest rate marketization of commercial banks net interest margin, which is the main innovation of this paper.Faced with the impact of interest rate marketization of the net interest margin, commercial banks and relevant government agencies to deal with, this paper gives some suggestions. Firstly, the government should foster sound financial markets, strengthen competition and reduce the social costs of commercial banks; Secondly, the government should promote the firm’s interest rate reform, optimize the financial ecology, given the commercial banks in the short term deposits and loans of independent pricing; Thirdly, commercial banks should continue to improve risk management, improve asset quality, positive financial innovation, improve the overall operational efficiency.