Interest rate liberalization and bank resource allocation efficiency: evidence from China

The market-oriented reform of interest rates is one of the most significant transformations in China’s financial system. Its impact on banks’ resource allocation efficiency at the micro level warrants close examination. Based on an unbalanced panel dataset of 314 Chinese commercial banks from 2007 to 2022, this paper empirically investigates the effect of interest rate liberalization on the efficiency of resource allocation in commercial banks, as well as the heterogeneity of this effect. The findings are as follows: First, the relationship between interest rate liberalization and bank resource allocation efficiency exhibits a pronounced U-shaped pattern, with two critical threshold values. When the interest rate liberalization index is below 0.460, marketization suppresses bank resource allocation efficiency. When the index lies between 0.460 and 0.501, the negative impact intensifies. However, once the index exceeds the critical threshold of 0.501, interest rate liberalization begins to significantly enhance efficiency. This dynamic evolution confirms the pattern of “reform pain followed by institutional dividend”. Second, the heterogeneity analysis reveals several important insights. Banks with high levels of innovation experience short-term pressure but exhibit 69.2% greater long-term elasticity in efficiency recovery compared to their low-innovation counterparts, underscoring the strategic value of financial innovation during the deepening phase of interest rate liberalization. In regions with higher degrees of marketization, efficiency improves 54.7% faster due to institutional advantages, providing empirical evidence for the “institutional environment as a reform accelerator” hypothesis. More importantly, banks in regions with higher levels of green finance improve their efficiency at a rate 2.1 times faster than those in regions with lower green finance development. This indicates that interest rate liberalization not only serves as a tool for enhancing bank resource allocation efficiency, but also provides a vital institutional foundation for channeling financial resources toward key areas of sustainable development.

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Publication Details

Journal
Humanities and Social Sciences Communications
Published
2026-11-05
DOI
https://doi.org/10.1057/s41599-026-09578-7
Primary Topic
Banking stability, regulation, efficiency
Type
article
Field-Weighted Citation Impact
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article

Interest rate liberalization and bank resource allocation efficiency: evidence from China

Qingbin Guo, Wensha Zhao
Humanities and Social Sciences Communications
Banking stability, regulation, efficiency
article

Interest rate liberalization and bank resource allocation efficiency: evidence from China

Qingbin Guo, Wensha Zhao
article en

Abstract

The market-oriented reform of interest rates is one of the most significant transformations in China’s financial system. Its impact on banks’ resource allocation efficiency at the micro level warrants close examination. Based on an unbalanced panel dataset of 314 Chinese commercial banks from 2007 to 2022, this paper empirically investigates the effect of interest rate liberalization on the efficiency of resource allocation in commercial banks, as well as the heterogeneity of this effect. The findings are as follows: First, the relationship between interest rate liberalization and bank resource allocation efficiency exhibits a pronounced U-shaped pattern, with two critical threshold values. When the interest rate liberalization index is below 0.460, marketization suppresses bank resource allocation efficiency. When the index lies between 0.460 and 0.501, the negative impact intensifies. However, once the index exceeds the critical threshold of 0.501, interest rate liberalization begins to significantly enhance efficiency. This dynamic evolution confirms the pattern of “reform pain followed by institutional dividend”. Second, the heterogeneity analysis reveals several important insights. Banks with high levels of innovation experience short-term pressure but exhibit 69.2% greater long-term elasticity in efficiency recovery compared to their low-innovation counterparts, underscoring the strategic value of financial innovation during the deepening phase of interest rate liberalization. In regions with higher degrees of marketization, efficiency improves 54.7% faster due to institutional advantages, providing empirical evidence for the “institutional environment as a reform accelerator” hypothesis. More importantly, banks in regions with higher levels of green finance improve their efficiency at a rate 2.1 times faster than those in regions with lower green finance development. This indicates that interest rate liberalization not only serves as a tool for enhancing bank resource allocation efficiency, but also provides a vital institutional foundation for channeling financial resources toward key areas of sustainable development.

Humanities and Social Sciences Communications
Hainan University (CN), Zhaotong University (CN)
Openalex Percentile: Top 11%
Banking stability, regulation, efficiency
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