A Study On The Market Structure Of Commercial Banks

Constant innovations, gradual deregulations, massive consolidations of commercial banks and rapid economic globalization in the last two decades have drastically changed the financial market structure. All of theses variations will significantly change the banking industry market structure. To some extent, they predicate the future competition within the banking industry. Banking competition and monopolization level greatly affects the efficiency of banking service and products. This will influence the quality and innovation degree of financial yield, in particular, the financial stability. Both theoretical documents and empirical work indicate that the banking competition degree affects enterprise financing and even the whole economic growth. Since 1960s, American and European scholars utilized concentration and competition structure approach and non-structure measure to examine the relationship between banking competition and banking monopolization, researched interaction between banking market structure, banking performance and financial crisis. This research contributed significantly to the reform of banking industry market structure. However, it must be pointed out that most of this study was only aimed at multinational banks and banks in developed counties. The research on banks in developing countries was rare. From uniform monopolistic model under planned financial system to high monopolization by four state-owned commercial banks and then to the current model with various financial institutes develop side by side at present, the Chinese financial sector has experienced huge transformations. In 2001, China formally joined in WTO, which means that China's banking will be totally open to the world according to requirements. Banking internationalization becomes an inevitable fact. In recent years, many foreign banks have begun to carry out their strategy quietly through investing and buying shares in Chinese banks. How to deal with the fierce competitive environment has become a hot topic within china's banking industry. This paper introduces the structural approach to model competition which embraces the Structure-Conduct-Performance (SCP) paradigm and non-structural model—Panzar and Rosse (P-R) model and comment on two schools of thoughts, i.e., partial equilibrium models and general equilibrium models in theory. Partial equilibrium economists believe that banks with monopolistic control can improve asymmetric information and reduce over-aggressive competition between banks, therefore speeding up economic growth. On the other hand, general equilibrium economists believe that over-concentration of banking power slows down economic growth or at least the empirical evidence on the benefits of the monopolistic banking structure is not convincing. Both models provide the theoretical foundations on the relationship between banking structure and economic growth but have their limitations. Secondly, through examining the concentration and performance variation of banks in Europe, America and some developing countries in practice, our research reveals that in 1990s, the banking concentration degree kept growing in Europe and America. Especially in many banks in America, the profit kept increasing with the concentration quantity growth. Then, we further examine the relationship between commercial banking market structure and financial stability and crisis. From policy point of view, it is important to know how these changes affect the Chinese financial sector through drawing lessons from the latest western research results. In this paper, we apply concentration ratio and Herfindal Index as well as the Panzar-Rosse model to assess the degree of competition in China. We find that the Chinese banking industry is still characterized by a monopolistic competition market with little competition. Secondly we analyze the relationship between the market structure and the banking industry performance. Our results show that a negative relationship meaning that poor performance is often associated with low degree of competition. Thirdly we study how the structure of the Chinese banking sector affects its economic growth. Using data between 1986 and 2003 in China, we find that concentration has a negative impact on economic growth. Finally, in order to improve the structure and promote competitive behaviour of Chinese commercial banks, we explore the efficient way of improving china's commercial banking structure and present some policy proposals: The first thing is to encourage development of private banking moderately. The second is to attract foreign strategic investiments. The third is to establish scientific decision system and reasonable incentive mechanism.