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| Competition and Efficiency: An Empirical Study Based on Regional Commercial Banks in China |
| ZHANG Dayong, ZHANG Zhiwei
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| Research Institute of Economics and Management, Southwestern University of Finance and Economics |
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Abstract The commercial banking system in China has experienced a series of reforms since the launch of the opening-up policy. With the fast pace of marketization, competition in China's commercial banking industry has inevitably intensified, which has been a major trend over the past decade. The challenges facing this ever-evolving industry therefore lie in two aspects: how much has the market-oriented transformation affected the industry, and more essentially, can competition improve efficiency？
While most research has focused on the idiosyncratic characteristics of banks, this study provides additional information by looking at the role of external conditions and factors from a macro-economic perspective, thus being more policy relevant. The banks of interest are regional commercial banks, and central to our research question is the efficiency of commercial city banks. Although these banks are still much smaller in terms of market share than the larger national banks, their fast development, increasingly important role and potentially significant impact are not negligible. Given their large numbers, collectively they have the ability to affect the stability of the whole banking system, which should draw sufficient attention from regulators and policymakers. It is therefore of critical importance to analyze the efficiency problem of these banks, to provide further evidence not only for a retrospective view of the extant banking sector reforms, but more importantly for the construction of future regional financial development policies.
Our methodology comprises two main parts. First, we use stochastic frontier analysis (SFA) to estimate the operational efficiency of each bank; we then construct an econometric model to examine the impact of regional competition on bank operational efficiency.
The bank information in our study is collected from the annual reports of the banks and the BANKSCOPE database. Given that our sample is composed of city and rural commercial banks whose number was relatively small before 2003, we choose the sample period starting in 2004 and ending in 2015, and construct an unbalanced panel accordingly. Using the China Banking Regulatory Commission (CBRC) authorization information of bank branches, we construct a city level competition measure.
The empirical results show that competition can enhance the operational efficiency of regional commercial banks, although the positive impact differs across bank types. Moreover, the impact of competition on efficiency is nonlinear. Over-competition can induce negative effects. A series of robustness checks corroborate our conclusion. In addition, we test for the moderating effects of cross-regional operation by these banks on the relationship between competition and efficiency.
Our results have clear policy implications. First, a healthy financial system and ordered competition are key to improving bank operational efficiency; clear regional disparities in terms of development imply that regional-specific policies are required. Second, the impact of regional banking development differs across bank types, which provides empirical evidence to authorities for optimizing the banking structure. Third, both over-competition and over-monopolistic market conditions in the banking sector are shown to be harmful. Regulators should aim for an optimal level of competition and ensure a healthy market structure for the banking sector.
In general, this study makes the following innovations and contributions to the literature. (1) Using the CBRC branch authorization certificate information to construct a regional banking competition measure is novel. The data cover all information over time and provide comprehensive information objectively, which minimizes the possible influence of undesirable endogeneity. (2) The sample period of this study was especially important in the development of China's banking system. It not only covers the development of city and rural commercial banks from embryo to prosperity, but also highlights the critical transitions from local to cross-regional operation, thus giving us a unique and interesting perspective. (3) Methodologically, when testing for the typical competition–efficiency relationship, the transmission mechanisms are also analyzed and confirmed via a number robustness checks and a mediator effect model.
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Published: 29 April 2019
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