Study on loan interest rates risk of commercial banks based on adverse selection

Since the implementation of interest rate liberalization, Chinese commercial banks loan rates are allowed to fluctuate around the benchmark rate based on the range 0.9-1.9 times. Except for housing loans rate slightly below the benchmark interest rate, others are higher than it, the highest for the interest rate broke surface 90%, which reaches loan rates upper floating ceiling of central bank. Smaller interest margin may sink enterprises into troubles, including high financing cost, low profitability and even loss, thus undermining their willingness and capacity for loan repayment and making loans more risky. Through the analysis of the relationship between loan interest rate and expected revenue of commercial banks in the model of adverse selection, this essay attempts to arrive at the conclusion that high loan rates unnecessarily yield fairer returns and may even incur the risk of the inability to bring back principals and interests, and encourage commercial banks to pay greater attention to the establishment of loan interest rates and reduce risks accordingly.