The Impact Of Interest Rate Liberalization On Commercial Bank Profitability

As the price of capital,the interest is core of a country's finance and economy and has regulating effects on capital market and monetary market for a country.Especially on financial market,the changes in interest will effect the stabilization and safety of financial market and then have a huge impact on the national economy.Therefore,the interest is one of the most important tool in adjusting macro-economy.All countries around the world used to have rigid control on interest and regulated national economy by adjusting interest.In 1973,theories about the interest rate liberalization was put forward by R.I.Mckinnon and E.Shaw and after that,America and other countries began implementing interest rate liberalization reform.Interest rate liberalization reform is very important for a country and the extent of interest rate liberalization also represent stages of a country's economic development.China has liberalized inter-bank lending rates in 1996 which represented the beginning of interest rate liberalization reform.And then,China has published many policies and liberalized rate of bond,money,loan and deposit so that the determination of interest rate is depend on the relation between supply and demand?Until October 23 in 2015,the people's bank of China liberalized the upper limit of deposit which means our country has completed interest rate liberalization reform.In around 20 years,our country has completed bond rate liberalization,monetary rate liberalization,loan and deposit rate liberalization.In China,commercial banks play very important roles in financial market.Their stabilization and safety has huge impact on financial market and economic development.Interest rate liberalization reform brings opportunity for commercial banks.It can accelerate commercial banks' financial innovation and create a more healthy business environment for them.However,interest rate liberalization reform also brings risks and competition to commercial banks.Before the reform began,interest rate was determined by the people's bank of China and the load rate is always 2.7 percent higher than the deposit rate,so the profit from the spreads of deposit and loan is enough for commercial banks to maintain and develop businesses.Interest rate liberalization reform liberalized the limit on deposit and loan rate which means commercial banks can determine interest rate by themselves.Therefore.the spreads of deposit and loan will decrease which must weaken commercial banks' profitability and then have bad influence on their devclopment.This thesis choose rate of asset as a criteria to measure the changes on the profitability of commercial banks during interest rate liberalization.After reading many thesis about commercial banks and interest rate liberalization,this paper choose sixteen listed commercial banks for research and divided them into three types including large state-owned shareholding commercial bank,municipal commercial bank and national medium-sized shareholding commercial bank.Large state-owned shareholding commercial banks include Bank of China,China Construction Bank,Industrial commercial Bank of China,Bank of Communication and The Agricultural Bank of China.Municipal commercial banks include Bank of Beijing,Bank of Ningbo and Bank of Nanjing.Joint-equity commercial banks include HuaXia Bank,China Everbright Bank,China Merchants Bank,China Citic Bank,Shanghai Pudong Development Bank.Minsheng Bank and PingAn Bank.This paper analyses the impact of interest rate liberalization on commercial bank profitability first and then use return on assets,net interest margin and other financial indexes as variables to do empirical research.All analysis are based on data from sixteen commercial banks.After theoretical and empirical analysis,we will put up forward some suggestions for commercial banks on how to deal with interest rate liberalization.This paper is consist of five parts.The first part introduce the background,study meaning,framework,method,innovation and insufficiency of this research.The second part is an overview on theories about interest rate liberalization and commercial bank profitability.The third part analyses the impact of interest rate liberalization on commercial bank profitability,including opportunities and challenges that interest rate liberalization brings to commercial banks.The fourth part analyses the impact of interest rate liberalization on commercial bank profitability by empirical method.Besides,this part divide all commercial banks into three types and do empirical research respectively and then make conclusion of all analysis.The five part put up forward some suggestions for commercial banks based on theoretical analysis and empirical research.This paper do empirical research not only based on all data from commercial banks,but also divided them into three types and do research respectively.Therefore,this research are different from former works since most existing works always just analyses one type of commercial banks or all commercial banks.In addition,this paper's data include 2015 so that this research have more realistic meaning.However,this paper only choose sixteen listed commercial banks and several variables so that it may cannot analyses all commercial banks in a comprehensive way.