The effects of the interest rates on bank risk in China

Abstract

We use non-performing loan ratio and insolvency risk to measure bank risk and construct panel data regression models to examine the effects of the interbank market rate, central-bank rate and bank-level lending rate on bank risk in China. Empirical results show that interbank market rate and the central-bank interest rate are positively correlated with bank risk, while the bank-level lending rate is negatively correlated with bank risk. We also analyse and explain the difference between the effects of the US interest rates and China’s interest rates on its own bank risk. Finally, we put forward some policy implications.