Interest rate instruments, banks’ decision-making behavior and term structure of credit
(2.School of Economics, Nanjing University 210093)
【Abstract】The term structure of credit is one of the important factors that influence the quantity of credit, but there is no sufficient research studying how interest rate instruments affect the term structure of credit in China. Different from the existing oversea research from the perspective of risk management motive, this paper, based on the special pricing mechanism of interest rate of Chinese commercial banks, built a two-stage commercial bank credit decision-making model from the perspective of profit motive and theoretically analyzed how the policy of benchmark lending rate influences the term structure of credit. It was found that the proportion of short-term loans in the commercial bank loans is positively correlated to the level of benchmark interest rate, but the level of benchmark term spread of short-term and long- and medium-term term loans may weaken the positive correlation. Meanwhile, the benchmark term spread itself may have a direct negative impact on the proportion of short-term loans. Based on the quarterly macro-data of 2005–2016, this paper adopted the TVP-FAVAR model and the time series linear regression model to support the above conclusion and verified the credibility of analyzing the transmission mechanism from the perspective of profit motive. The conclusion of this paper has some implications: the macro-control should take the micro-behavior of commercial banks into full consideration, pay attention to the control of credit resource allocation by the yield curve of credit rate, strengthen the management of the price signal of the market-oriented interest rate, and make a comprehensive use of interest rate instruments and structural monetary policy instruments.
【Keywords】 benchmark lending rate; pricing mechanism of interest rate ; term structure of credit;
(Translated by GENG Qingyou)
. ① The funds provided by commercial banks include loans in Chinese and foreign currencies, entrusted loans, trust loans, and undiscounted bankers’ acceptance. The data are from the WIND database. [^Back]
. ② Short-term loans are mainly used to meet the needs of borrowers for current capital in production and operation, while long- and medium-term loans are mainly used for technological reform, new fixed assets projects, and others. Short-term loans refer to the loans with the terms less than one year (included) and long- and medium-term loans refer to the loans with the terms longer than one year (not included). This paper divides the credit terms according to this standard. [^Back]
. ① Zheng et al. (2016) compared the loan repricing cycles between China and the US. The average repricing period of the US existing loans is largely limited to one month, while about half of China’s four major state-owned banks have the average repricing period of over three months. The oversea studies about interest rate policy influencing the term structure of credit are mostly based on the US data, so the comparison between China and the US is quite typical. [^Back]
. ① The lower limit of lending rate was changed to 0.8 times and then 0.7 times the benchmark interest rate from June 8 to June 6 of 2012; it was cancelled on July 20, 2013. [^Back]
. ② The data are from the WIND database. [^Back]
. ① Benchmark interest rate has long been the benchmark lending rate announced by PBC. It is generally reflected in the loan contract as that: actual lending rate = benchmark lending rate rise (drop) by X% in one year, where X is the floating ratio. However, PBC announced in October, 2013 the formal operation of the concentrated quotation and publishing of loan prime rate (LPR), authorized the National Interbank Funding Center to publish LPR, and started to examine the loan quotation by LPR against commercial banks from October, 2014. Therefore, the commercial banks have gradually substituted LPR for the benchmark lending rate in the loan pricing, which is reflected in the loan contract as that the benchmark lending rate is substituted by LPR and the ratio of floating up or down is turned into the adding or cutting base points. No matter benchmark lending rate or LPR is adopted as the benchmark interest rate, its core is the pricing method of benchmark interest rate. [^Back]
. ② Due to space limitation, please refer to the open appendix for the figure about the relationship between the two at the website of China Industrial Economics (http://www.ciejournal.org). [^Back]
. ① According to the actual monetary policy operation, the change of benchmark term spread is accompanied by the change of short-term and long- and medium-term benchmark lending rates and is mainly due to the different change range of short-term and long- and medium-term benchmark lending rates. However, to simplify the analysis on the change of benchmark term spread, it can be assumed that the monetary policy is not adjusted; that is, only the benchmark term spread changes and the benchmark interest rate direction remains unchanged. [^Back]
. ① See Nakajima et al. (2011) for specific equations and the parameter setting mentioned below. [^Back]
. ② The factor analysis is to draw a common potential factor among various variables and include the variables with similar essence in a single factor and then represent the original variables by several factors, which can not only ensure the information amount of the original variables but also lower the number of variables. According to the understanding about the economic connotation of variables, researchers can try to name the factors accordingly. However, with reference to the practice of Kazi et al. (2013), Koop and Korobilis (2014), and Liu et al. (2016), researchers can choose not to name the macro factors if without accurate understanding about them. In addition, in the TVP-FAVAR model, potential factor is not the core concern, so this study directly names it the potential factor vector (f1t and f2t). [^Back]
. ③ Due to space limitation, please refer to the open appendix for the figure of time series at the website of China Industrial Economics (http://www.ciejournal.org). [^Back]
. ④ Due to space limitation, please refer to the open appendix for the figure of related parameter estimation at the website of China Industrial Economics (http://www.ciejournal.org). [^Back]
. ① Due to space limitation, please refer to the open appendix for the trend of benchmark term spread at the website of China Industrial Economics (http://www.ciejournal.org). [^Back]
. ① When measuring the proportion of short-term loans, we can use either short-term loan balance / long- and medium-term loan balance or short-term loan balance / (short-term loan + long- and medium-term loan balance), which show a consistent rule. However, the former exceeds the latter in the specification of fluctuation. To better calculate the change of time series in TVP-FAVAR, this paper adopts the former, while in linear regression, this paper adopts the latter because the data features need to be more stationary due to model limitation. [^Back]
. ① After the cross term is introduced, though the coefficients in front of LSRATE × SHORTRATE and LSRATE are insignificant, F-value is significant at the level of 10% in the joint significance test of the two. Therefore, this paper believes that the estimation coefficients before the variables still have sound reference. [^Back]
. ① This paper conducts the correlation test between net profit and new loans of commercial banks in each quarter of 2011–2016. It is found that the correlation coefficient of the two is 97% (significant at the level of 5%), while the correlation coefficient between net profit and new loans of commercial banks in each year of 2005–2016 is 85% (significant at the level of 5%). According to the actual business of commercial banks, loan interest income remains the most important profit source of commercial banks. Though the non-interest income gradually increases in proportion, a significant part of it is driven by loans, so the correlation is very high between the net profit and new loans of commercial banks. [^Back]
. ② When benchmark lending rate influences the term structure of credit, the change of benchmark term spread has a moderating effect on it. However, according to the above empirical test, it influences the change degree instead of the direction of the adjustment in term structure of credit during the sample period. Since the number of samples is limited and the difference of variables is needed in the verification of the profit mechanism, the change of benchmark lending rate is adopted to describe the different policy stages of benchmark lending rate so as to ensure freedom and better reflect the directional impact of the adjustment in the term structure of credit. [^Back]
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