- Log In/Sign Up
- E-ISSN2233-5382
- KCI
E-ISSN : 2233-5382
A Study on the Profitability of the Commercial Bank in Terms of Interest Rate Marketization : Based on FMOLS Model
Abstract
Purpose - As an important participant in the financial markets, the commercial bank will be impacted by the interest rate marketization. Owing to the special condition of China, this paper tries to explore the impact of operating mechanisms between interest rate marketization and the profitability of the commercial Bank. Research design, data and methodology - This paper applies time series data from 2005 to 2016. Due to the short period of time series, autocorrelation often occurs. Therefore, the fully modified least squares(FMOLS) will be used to conduct an empirical analysis. The reason is that it can move off the autocorrelation between variables and disturbance term. And FMOLS also can make estimated cointegrating parameters closed to normal distribution. More importantly, in order to avoid spurious regressions, the Augmented Dickey-Fuller Test will be used to verify the stationarity of all variables. The total return of asset is treated as the profitability of commercial bank. The net interest spread is treated as a measurement of interest rate marketization. Both are regarded as dependent variables. The non-interest income or gross revenues and impaired loans or gross loans are treated as independent variables. The sixteen representative listed commercial banks are divided into three categories (state-owned, share-holding and city-owned) to conduct an estimation. Results - Via empirical analysis, the findings show that the net interest spread has a positive effect on the profitability of the commercial bank. More specifically, 1% increase in the net interest spread will lead 0.157% increase in the profitability of state-owned commercial bank, 0.269% increase in the profitability of share-holding commercial bank and 0.263% increase in the profitability of city-owned commercial bank. If regarding the sixteen listed commercial city as a whole, 1% increase in the net interest spread will lead 0.267% increase in the profitability of the commercial bank. Conclusions - As the interest rate marketization, the importance of interest rate on the profitability of commercial bank has become more and more significant. The empirical evidences also prove that the net interest spread can bring about the change of the commercial bank's profitability. Therefore, policy-makers of commercial banks should fully understand the operating mechanism between them.
- keywords
- Interest Rate Marketization, Profitability of Commercial Bank, Augmented Dickey-Fuller Test, Fully Modified Ordinary Least Square
Reference
Bai, J. (2010). A Study on the Impact of the ability of Profit-owning on China’s Commercial Bank. Journal of Financial Development Research, 6, 51-55.
Banna, H., Ahmad, R., & Koh, E. H. (2017). Determinants of Commercial Banks’ Efficiency in Bangladesh: Does Crisis Matter?. The Journal of Asian Finance, Economics and Business, 4(3), 19-26.
Francis, M. E. (2013). Determinants of commercial bank profitability in Sub-Saharan Africa. International Journal of Economics and Finance, 5(9), 134.
Hu, J. (2017). Impact of Interest Rate Liberalization on City-owned Commercial Bank: Based on Datong Bank. Times Finance, 30, 055.
Li, A., & Chen, G. (2014). Impact of Interest Rate Liberalization on Macro-economy. Financial Regulation Research, 6(1), 12-21.
Lu, J. A., Lateng, S. D., & Yin, Y. (2013). Factors to Affect the Profitability of Chinese Commercial Banks-An Empirical Analysis Based on the Data during 1997-2010. Finance Forum, 1, 3-14.
Maudos, J., & de Guevara, J. F. (2007). The cost of market power in banking: Social welfare loss vs. cost inefficiency. Journal of Banking & Finance, 31(7), 2103-2125.
Mia, M. A. (2017). Interest rate caps in microfinance:Issues and challenges. The Journal of Industrial Distribution & Business, 8(3), 19-22.
McKinnon, R. I. (1993). The Order of Economic Liberalization:Financial Control in the Transition to a Market Economy(2nd ed.). Baltimore, MD: John Hopkins University Press.
Poghosyan, T. (2010). Re-examining the impact of foreign bank participation on interest margins in emerging markets. Emerging Markets Review, 11(4), 390-403.
Salehi, M., Khaksar, J., & Torabi, E. (2014). Islamic Banking Ranking Efficiency Based on a Decision Tree in Iran. The East Asian Journal of Business Management, 4(2), 5-11.
Shadkam, E., & Bijari, M. (2015). The optimization of bank branches efficiency by means of response surface method and data envelopment analysis: A case of Iran. Journal of Asian Finance, Economics and Business, 2(2), 13-18.
Wang, P., & Kim, J. P. (2014). The Value of Reverse Mortgage Loans: Case Study of the Chinese Market. The Journal of Asian Finance, Economics and Business, 1(4), 5-13.
Xu, Z. (2014). Impact of Interest Rate Liberalization on Net Interest Spread of Bank: Based Henan Province. Journal of Financial Development Research, 2, 42-45.
Yin, J. (2011). Analysis from the American and Japanese interest rate market on the financial operation. Asia-Pacific Economic Review, 3, 25-30.
Zhou, H., Han, Z. W., & Zhong, R. (2008). A Study on the Impact of Net Interest Spread on China’s Commercial Bank: Based on Data from 1999 to 2006. Journal of Financial Research, 4, 69-84.
- Downloaded
- Viewed
- 0KCI Citations
- 0WOS Citations