Abstract: The paper firstly investigates and studies the high information asymmetry and high risks empirically which Chinese financial institutions such as banks face in loan contracting.Then the paper studies how interest conflicts are produced under information asymmetry theoretically and professionally respectively, and explores how to design incentive loan contracts to reduce risks in the process of loan contracting to protect bank’s interests and balance all individual party’s interests.

Key words: information asymmetry, interest conflicts, loan contract, interest rate, collateral