Abstract

Info

Keywords:: convergence of rates; market competition; bank stability; interest rate marketization reform

Abstract:: Loan Prime Rate(LPR)pricing mechanism reform is an important step of the interest rate marketization reform in China, leading to the convergence of lending rates. Due to the “double-edged sword” effect of interest rate marketization reform, convergence of rates would not only promote the effect of monetary policy, but also exacerbate the competition and challenge for commercial banks. Therefore, it would be significant to study the influence of the convergence of rates on commercial banks. Based on the banking data between the first quarter of 2011 to the third quarter of 2019, this paper uses vector error correction model to analyze the relationship among the convergence of rates, market competition, and bank stability from macroscopic, mesoscopic and microscopic views. The research shows that, the convergence of rates is the granger cause of market competition, and bank stability; the influence of market competition is negative to bank stability; the change of the pressure from return and risk management is not the granger cause of market competition; the influence from convergence of rates to bank stability has a long duration, which leads to a complicated environment for commercial bank. In order to manage the challenge of convergence of rates, this paper offers proposals on the reform strategy, policy decision, pricing management and risk management.