Foreign Banks’ Entry

Opening-up to foreign banks is one of greatest reform measures taken by Chinese banking industry. However, the existing literatures pay very little attentions to the influences of banks’ branch networks, which are critical to banks’ operations. Therefore, those researches can’t fully explain the pattern of competition in China since the opening-open ten years’ ago. Branches are banks’ main channel resources, and their branch scales are influential to credit competition; and especially the differences among banks’ branch quantities are really enormous in China. On the other hand, foreign banks are restricted by policies in the aspect of equity investment proportion, which has an important effect on foreign banks’ choice of entry modes and on the competition after their entry. Based on the backgrounds, this dissertation establishes a model of competition among banks’ branches, and theoretically finds how branch scales affect foreign bank’s entry modes and on the corresponding competition after different entry mode. Our main contents include three aspects as follows.Firstly, considering the background of the giant difference among foreign and domestic banks’ branch scales, this dissertation establishes a theoretical model of credit competition among banks’ branches, so as to find the influence of banks’ branch scales on foreign banks’ Greenfield investments. The conclusions show: with foreign banks expanding branch investments, they can compete for more market share and profit; moreover, the intensified competition also makes marginal profit of branch investment decreases, and the degree of decrement is determined by credit quality and market scale. Besides, the foreign bank with more branches can better make use of its technological advantages and market opportunities.Based on the above model, this dissertation considers the opportunities of branch investments as a series of real options, and then builds real option model about branch sequential investments to explore the characteristics of foreign bank’ new branch investment. The real option model finds that foreign bank’s real option value equals to the summation of all investment options’ values, where the option value of single branch investment is determined by the marginal profit of next branch investment.Secondly, this dissertation analyzes the credit competition when a foreign bank invests in one domestic bank with different branch scale, in order to find the influence of branch scale on the competition after the equity investment in the domestic bank. The conclusions show: when a foreign bank improves some domestic bank’s technological levels, competition becomes fiercer, which has more negative impacts on the profits of big banks due to their relatively large market shares. However, if the improved technology can partly helps the domestic bank overcome adverse selection risk, this positive influence will lessen the negative influence caused by competition and make the domestic bank earn more profit; moreover, the big bank has larger market shares and therefore its profit grows faster.Based on the research of foreign bank’s Greenfield investment and equity investment, this dissertation further studies the influence of bank’s branch scales on foreign bank’s entry modes. The conclusions show: at the initial stage of Greenfield investment, the foreign bank has very little branches, which restricts its ability in raising funds and competing for borrowers and then affect its net investment revenue; however, with investing more branches, the foreign bank can get more net revenue than that of equity investment. As the foreign bank can’t expand their branches in a short time and branch investments call for high capital capability, the foreign banks with capital strength are inclined to enter through both Greenfield investment and equity investment; and if their capital can’t support two entry modes at the same time, the foreign banks are apt to enter through Greenfield investment when they have superior risk management technology, otherwise through equity investment, where investment in big domestic bank contributes to more net revenue.Thirdly, considering the situation that Chinese banking industry has experienced a rapid development stage in the field of personal wealth management market in recent years, this dissertation continues studying how banks’ branch scales affect the competition in this field.At the beginning, considering the underlying assets of banks’ personal wealth management products as portfolios(tradable assets), this dissertation establishes a model of competition among banks’ branches, in order to study the influence of banks’ branch scales on the expected return, banks’ risky behavior, banks’ market influence. The conclusions show: bank’s branch scale affects its expected yield of wealth management product and the bank with small branch scale is inclined to adopt more radical competitive strategy(higher expected yield) to expand its living space, i.e., there exists a phenomenon of yield premium. Besides, the bank can also compete for more market share by increasing the risk of underlying assets; however, the risk-taking behavior of small bank has limited influence on competition, while the behavior of the big bank has a notable influence.In the next place, when fixing the underlying assets of banks’ personal wealth management products as loans(non-tradable assets) and considering the information asymmetry among investors(surplus units), banks, and the fund demanders(deficit units), this dissertation studies how bank’s branch scale and information asymmetry affect the competition in the market of wealth management market. The results show: the bank with small amount of branches, especially the foreign bank with superior information processing capability, can obtain temporary competitive advantage by disclosing its private information, which will force other banks to unveil their own private information and thus promote the degree of transparency in the wealth management market; moveover, this influence can be enhanced when this small bank expands its branch scale. Lastly, once all banks disclose their private information, the sustained competitiveness depends on the superior quality of banks’ private information.Our research not only theoretically acquires meaningful outcomes, but also provides persuasive explanations for foreign banks’ current situations in China; moreover, the research can be instructive to foreign banks’ development in China and to the further opening-up of Chinese banking industry.