Abstract: By making use of Montin-Klein model induced liquidity risk, this paper analyses commercial bank's optimal strategy when central bank gives reserves and deposit and loan rates regulations. When the central bank imposes a regulation on reserves, the ceiling on the reserves decreases
the loan and deposit rates. When regulating on the loan and deposit rate, the commercial bank will make optimal strategies in different cases. Both the penalty rate r_p and interest rate r impact the strategy of the commercial bank. Because of the large management cost in many developing countries, the central bank usually can't obtain its object, and the commercial bank also can't realize its optimal strategy. The commercial bank must do some internal adjustment to adapt the international environment. With the Chinese financial reform, these analyses propose some useful advices for the central bank to increase the efficiency of regulatory policies.

Key words: Commercial bank, Regulation, Liquidity risk, Reserve, Loan and deposit rate