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Two-Track Interest Rate Pricing and the Pricing of the Loan Rate in the Context of the Loan Market of Monopolistic Competition

【Authors】
SUN Guofeng
【WorkUnit】
People's Bank of China, Princeton University, 100033.
【Abstract】

This paper studies the interest rate pricing of commercial banks in the monopolistic competition of the loan market. By referring to Sun & Duan (2016) and Alessandri & Nelson (2015), this paper constructs a multi-sector interest rate pricing model of commercial banks, explains the pricing differences between loan interest rates and bond yields under the condition of monopolistic competition in the loan market, and conducts an empirical test by referring to the derived pricing equation. The results show that the commercial banks price the bond mainly according to the market risk-free interest rate. However, the loan interest rate does not follow the market risk-free interest rate and is significantly positively correlated with the liabilities cost of banks, bank loan scale and default ratio since the liberalization of deposit and loan interest rates. Further, this paper analyzes the reasons for pricing of bank loans without reference to market interest rates through empirical tests, and holds that the chronic existence of official benchmark interest rates and the weak pricing ability of small and medium-sized banks are the main reasons. Finally, this paper proposes to fade out the benchmark lending rate, among other policy recommendations.

JEL:G21, E43, E58

【KeyWords】
Dual-Track Interest Rate Pricing, Interest Rate Liberalization, Interest Rate Pricing, FTP Pricing