The Impact of Interest Rate Marketization on Commercial Banks’s Income Structure-An Empirical Analysis of China's LPR Mechanism Reform based on DID Method

Abstract

As the process of marketizing interest rates in China continues to advance, it becomes increasingly essential to evaluate the policy's impact on commercial banks' operations. The purpose of this article is to elucidate how China's commercial banks' revenue structure is affected by interest rate deregulation. By treating the reform of the Loan Prime Rate mechanism as a quasi-natural experiment and employing the difference-in-differences method, the goal is to elucidate the effects of the reform on commercial bank operations. Through empirical analysis using annual data from 2013 to 2022 for 42 listed commercial banks, the findings reveal that the LPR mechanism reform has had a negative impact on the net interest margin but a positive influence on the proportion of non-interest income. This indicates that the reform significantly contributes to the transformation of the income structure and profit model of Chinese commercial banks, highlighting the implications for ongoing interest rate marketization reforms. This study not only contributes to the academic discourse on interest rate marketization and banking operations but also offers pragmatic insights for policymakers and banking executives navigating the complexities of financial market reforms in China.