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A Study on Commercial Bank Loan Mechanism under the Condition of Interest Rate Liberalization

Author: QuanWei
Tutor: WangCong
School: Jinan University
Course: Finance
Keywords: Commercial bank Interest rate mechanism Clients distinguish mechanism Capital liquidity management mechanism
CLC: F832.4
Type: Master's thesis
Year: 2013
Downloads: 279
Quote: 0
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Abstract


Commercial banks play an important role in nowadays China, combining the capital surplusside and the capital shortage side. However, since bank loan clients themselves own moreinformation than commercial banks, clients (which stand for corporations in this article) tend tohide their true information for the sake of their own or they will choose actions that may beharmful to commercial banks, violating contract for instance, under the condition that interestrate of loan is controlled by the government. What’s more, the result of clients’ choice may leadto the improper way of macro economy development.In this article, we concentrate on analyzing the how commercial bank loan mechanismworks and how to make it work better. According to the principal of commercial bankmanagement, commercial bank loan mechanism consists of three sub-mechanisms, interest ratemechanism, clients distinguish mechanism, and capital liquidity management mechanism. Firstof all, we consider rational behavior of commercial bank and its client of different style inchapter3, letting the bank pursue maximum profit under the constraints that client get more mainbusiness income which defined as EBIT minus interest charges. Second we build up interest ratemechanism by solving the adverse selection and moral hazard problem. Third, we constructclients distinguish mechanism by using the constraints of interest rate mechanism in chapter4.Forth, we establish capital liquidity management mechanism by applying Market MicrostructureTheory in chapter5. Then in chapter6, we apply Efficient Markets Hypothesis into the loanmechanism to find out what the most optimal action of commercial banks is under differentmarket structures. Finally, we demonstrate that the three sub-mechanisms do not have conflictionand the commercial bank loan mechanism is economically efficient in chapter7.With all the work we’ve done by now, we can confidently conclude that commercial bankloan mechanism do exist and it costs nearly nothing but the rational action of commercial banksand its clients.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Credit
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