Foreign Banks’ Entry Modes Based On Collateral Loan View

Chinese banking reform provides a great opportunity for the foreign bank to enter China’s banking market, which, in turn, facilitates the establishment of an effective Chinese banking system. According to some related regulations of the Chinese government, foreign banks can establish locally-incorporated foreign bank in China through Greenfield investment; or they are able to take stakes in the domestic banks under the minority holding constraint. In the face of the great potential of China’s banking market, how will foreign banks choose the optimal mode? Moreover, how will these factors influence the choice of their entry mode, such as constraints of the existing policies, uncertainty of the future market, future policy changes, and the credit competition between domestic and foreign banks? Existing studies highlighting the mode selection of foreign banks’ entry are largely conducted from the perspective of credit loan. Nevertheless, in reality, collateral loan accounts for the highest percentage of credit products in the Chinese banking market. Hence, analyzing the mode selection of foreign banks’ entry from the viewpoint of collateral loan is of considerable realistic significance.In line with the development and present situation of foreign banks in China, by utilizing game theory, the thesis establishes a credit competition model of the domestic and foreign banks from a collateral loan perspective. Meanwhile, on the basis of this model, real option theory is employed to analyze the impact of market and policy changes on the mode choice of foreign banks’ entry. Then, considering the influence of domestic banks’ strategic decision on foreign banks’ entry mode selection, the thesis adopts the option game theory. The principal content and research findings are as follows.Firstly, the thesis assumes that the domestic banks have access to the information of initial old customers, reflecting their incumbent advantages, while foreign banks enjoy operating efficiency advantages. Based on the Salop model, the thesis builds a single- period and multi- period credit competition model between domestic and foreign banks from a collateral loan perspective. The research shows that, when both domestic and foreign banks use collateral as a screening device to sort borrowers, whether it is single or multi-period credit competition between domestic and foreign banks, the operating efficiency advantage of foreign bank outweighs the information advantage of initial old customer in domestic banks. Then, the thesis, from the view of liquidating collateral ability, explores the domestic banks’ incumbent advantages. Due to the inadequate Chinese legal system and the lack of law enforcement, the long serving incumbent domestic banks are more familiar with operation under such an imperfect legal system. It is assumed that domestic banks have higher ability of liquidating collateral than foreign banks, reflecting their incumbent advantages. On the basis of the previous studies, the thesis builds a credit competition model of domestic banks with liquidating collateral ability advantages and foreign banks with operating efficiency advantages, obtains the pure strategic solution, and analyzes the influence of domestic banks’ incumbent advantages and foreign banks operating efficiency advantages on credit competition. The above analysis lays the foundation for later study.Secondly, considering the Chinese government’s minority holding constraints of foreign banks taking shares in domestic banks, this thesis employs real option theory to analyze the impact of uncertainty of the market and future policies on foreign banks’ expand and quit option, and further discusses the influence of which on the choice of their entry mode. Findings reveal that the higher the market uncertainty is, the greater the expand option value of foreign banks is. They, therefore, tend to choose Greenfield investment. The quit option of foreign banks increases with the rise of credit market scale uncertainty, and at this time they are hence more likely to take shares in domestic banks. The movitation of foreign banks taking shares in domestic banks is weakened by high uncertainty of the future merger and acquisition policies as well as the policy of minority holding constraints. Furthermore, the unique feature of foreign banks is an essential factor influencing their entry mode choices. The higher foreign banks’ operating efficiency is, and the greater their ability of liquidating collateral is, the more likely they are to choose Greenfield investment.Finally, option game theory is adopted in the thesis to analyze the impact of domestic banks’ decisions on that of foreign banks’ entry mode. The study concludes that when foreign banks’ ability of liquidating collateral are greater, they tend to choose Greenfield investments, and their choices are not likely to be affected by domestic banks’ decisions. As foreign banks’ ability of liquidating collateral decreases, they tend to take shares in domestic banks, and wherther foreign banks can take stakes in domestic banks depends on the domestic banks’ ability of promoting their operating efficiency by investment. More specifically, when domestic banks’ autonomous investment ability are similar, foreign banks tend to cooperate with the larger domestic banks; when there is a wide variety of the levels of such ability, they tend to take shares in those banks of higher autonomous investment ability.In terms of regulating the behavior of foreign banks’ entry, the research findings provide some suggestions for the Chinese government. Establishing a sound legal system, enhancing law enforcement, and building a standard collateral assessment market is beneficial to foreign banks’ Greenfield investment.