IDEAS home Printed from https://ideas.repec.org/a/eee/finana/v103y2025ics1057521925002947.html
   My bibliography  Save this article

The impact of interest rate liberalization on loan pricing efficiency: Theory and evidence

Author

Listed:
  • Chen, Wen
  • Li, Guangzi
  • Liu, Jianxiong

Abstract

Based on the concepts of transaction and relationship loans, we derive a loan pricing model under interest rate regulation and analyze the effect of removing the cap and the floor in interest rate regulations on loan pricing efficiency. Our model shows that the impact on loan pricing efficiency of lifting the cap on loan interest rates is not definite, whereas removing the floor on loan interest rates significantly improves loan pricing efficiency. An important mechanism for improving loan pricing efficiency by removing the floor is that this change has encouraged more borrowers to shift from relationship loans to transaction loans, thereby reducing the banks' monopoly pricing power over borrowers. Our empirical analyses using a sample of loan contracts at Chinese listed firms around the time of interest rate deregulation support the model predictions. Collectively, our results suggest that liberalization of interest rate caps increases demand for relationship loans and thus might or might not increase loan pricing efficiency, depending on the monopoly power of banks. Our findings contribute to the policy of liberation interest rate regulation.

Suggested Citation

  • Chen, Wen & Li, Guangzi & Liu, Jianxiong, 2025. "The impact of interest rate liberalization on loan pricing efficiency: Theory and evidence," International Review of Financial Analysis, Elsevier, vol. 103(C).
    • Handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002947
    DOI: 10.1016/j.irfa.2025.104207
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1057521925002947
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.irfa.2025.104207?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Keywords

    Interest rate liberalization; Loan pricing efficiency; Relationship loans; Transaction loans;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finana:v:103:y:2025:i:c:s1057521925002947. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620166 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.