The Evolution Mechanism of Commercial Bank Wealth Management Products' Yield Rate Liberalization: A Theoretical and Empirical Analysis Based on the Modified Hotelling Model
LUO Ronghua, HE Zehui, LIU Jingjing, ZHAI Lihong
School of Finance, Southwestern University of Finance and Economics; Asset Management Department, Bank of JIUJIANG
Summary:
Interest rate liberalization has always been the focus of finance research in China. The development of commercial banks' wealth management products (WMP) is closely related to the process of interest rate liberalization. As substitutes for deposits, WMPs provide investors with yields that studies have called quasi-market-oriented deposit rates. However, most studies have only conducted cross-section analyses on the pricing mechanisms and the WMP’s characteristics. Few studies have considered the evolution mechanism behind the WMP’s yield over time (e.g., the effect of competition and game behavior on a bank's yield rate).This paper focuses on the evolution mechanism. Generally, commercial banks first determine the upper and lower limits of the WMP’s yield based on the market environment and macro and micro factors. Then, combined this information with the yield rates of other competitors in the market, they compete or “play” with each other over yield rates to achieve profit maximization. The above competition mechanism is repeated by different banks and ultimately results in the WMP’s market-oriented yield rate. The formation mechanism behind market-oriented WMP yield rates and that of market-oriented future deposit rates share many similarities. Therefore, our research will advance the literature on the formation mechanism behind market-oriented future deposit rates and provide ways to improve the supervision and guidance of commercial banks. This paper will focus on the effect of banks' competition and game behavior on WMP yields, as WMP yield is critical to the formation of the market-oriented yield rates. We establish the modified Hotelling model and divide banks into “winners” (the high-ranking banks on WMP yields) and “losers” (the low-ranking banks on WMP yields) based on the tournament theory dichotomy. Then, we analyze the behaviors of the winners and losers over the next period and explore the variation regularity of the competition mechanism's strength. On this basis, we use the WMP yield data from the Institute of Trust and Financial Management of SWUFE during 2005 to 2019 to examine the theoretical model and hypotheses. The empirical results show that WMP yield rate losers increase their yield rates more than winners in the next period. Thus, we can see the competition mechanism of the losers chasing the winners. We also find that the series of policies and regulations introduced by the CBRC reduced the banks' competitive behavior on WMP yield rates. This paper provides the following contributions. First, it is the first study to use the modified Hotelling model to analyze the effect of banks' competition and game behavior on WMP yields. Second, this paper empirically studies the competition and game behaviors and the variation regularity to reveal the formation mechanism behind WMP’s market-oriented yield rates. Third, this paper empirically tests the implementation effect of relevant policies and regulations. The test's findings will help regulators evaluate policies and regulations, improve the method of financial supervision, and ensure the healthy development of the WMP market. The regulators decided to liberalize the deposit interest rate's upper limitation in 2015, completing the liberalization of the deposit interest rate. However, deposit interest rates are still low because of benchmark interest rates for deposits and loans. The process of financial disintermediation can effectively propel the liberalization of deposit rates, as shown by the experiences of developed countries. Non-deposit financial products, such as WMPs, play an important role in the liberalization of interest rates. However, a surplus of financial products and services in the financial market that can replace deposits could weaken the function of the money supply and settlement medium for deposits.
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LUO Ronghua, HE Zehui, LIU Jingjing, ZHAI Lihong. The Evolution Mechanism of Commercial Bank Wealth Management Products' Yield Rate Liberalization: A Theoretical and Empirical Analysis Based on the Modified Hotelling Model. Journal of Financial Research, 2020, 485(11): 133-150.
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