The Industrial Organization Theory In Banking And The Design For The Structure Of Chinese Banking Industry

Based on the industrial organization theory, this dissertation sets up a framework of the industrial organization in the banking market, considering banking industry's characteristics such as multi-products, multi-period and asymmetric information. It considers basic conditions, variables of market structure, conduct and performance special to the banking industry. It considers structure as market structure and property structure, performance as allocation efficiency, production efficiency, financial stability and microfinance availability, broadening the traditional framework. The best banking market structure is analyzed from multi-dimensions in the background of financial system. It provides theoretical fundamentals for the institutional design banking market structure, and suggestions for the public policy on the reform of banking market structure.In the research of market structure of banking industry, it constructs theoretical models of monopoly banking market and duopoly banking market, showing both positive and negative effects in welfare analysis. By analyzing the particular mode of Chinese banks'market power, it is shown that the main cause of low efficiency of Chinese banking industry is probably not the concentration of market structure but the bureaucratic characteristic of state-owned banks'market power. By the international comparison of the banking market concentration ratio, it is shown that most markets belong to the duopoly market, including China, and many banking market concentration ratio is still rising, mainly because of the characteristics of banking industry and influence of technology innovation. With the analysis of the entry barrier in the banking market, it is shown that incumbents'reputation and branch network advantage is the most effective barriers to entry. Depositors'risk averse preference and externality of customers'demands for bank's services make new competitors difficult to survive, resulting non-competitive market structure. Moreover, there are many regulations as entry barrier and takeover or emergent financing as exit barriers aiming to stabilize financial system. So duopoly market structure in banking industry is the result of self-revolution and institutional arrangement.In the research of conduct of banking industry, it analyzes the pricing strategy of banks. Deposit price and the price of intermediary business are competitive. And the competitiveness in deposit price is Bertrand style, prisoners'dilemma occurring in some occasions. Even regulating deposit price, non-public price competitiveness is high. After comparing loan market and general product market it is shown that the Loan price war is deterred. Both debtors'discretional interest rate and credit rationing are analyzed. In analyzing the product differentiation of banks, such rules as quality first in vertical differentiation and maximizing horizon differentiation are derived, and the product differentiation strategies are designed. Bank merges and acquisitions in developed countries and emerging markets including China are analyzed, targets of M&A are compared.In the research of performance of banking industry, stochastic frontier analysis is used to measure 17 banks'cost efficiencies and profit efficiencies for the period 1998– 2003. While testing tradition collusion hypothesis and efficient structure hypothesis, it is shown that the impact of market concentration ratio on bank performance is not statistically significant, the impact of market share on bank performance is negatively significant, and the impact of cost efficiency on bank performance is not statistically significant, with the result of both hypothesizes being rejected. While analyzing the impact of market structure and property on structure Bank performance, it is shown that the impact of profit efficiency on bank performance is positively significant, the impact of market share on profit efficiency is positively significant, and non-state ownership on profit efficiency is positively significant. The econometric results indicate that the most important reasons of the poor performance of state-owned bank are the single property structure and state-owned monopoly. If state-owned banks are transformed into stock companies, and proper property structure and corporate governance structure of banking industry are set up, then efficient structure hypothesis may not be rejected. With respect to the stability of banking industry, it is shown that the impact of competitiveness on the stability of banking industry is uncertain. Over competitiveness among banks may lead banks to take more risky activities, and destabilize banking industry. Reasonable competitiveness may lead banks to take risk properly, preventing moral hazard. Concentrated structure of banking market has scale economic effect, and big banks are supported by the government, both of which help to stabilize banking industry.Based on the above results, this paper want to find the best market structure of banking industry from multi-dimension including financial system, allocation efficiency, production efficiency, microfinance and financial stability. From Whichever point of views, both theoretical and empirical researches indicates that diverse market structure has no advantage over concentrated market structure. On the contrary, concentrated market structure is better than diverse market structure on the resource allocation among financial system, banks'efficiencies and financial stability, and encourages microfinance on the long run. The lower efficiency of Chinese state-owned banks and the dilemma of medium-and-small company finance are mainly due to one hundred percent state ownership and corresponding governance structure deficit. Not the loose access to medium and small banks but relatively concentrated market structure under the reform of property structure is suitable for banking industry. According to this, the framework of institutional design on the market structure of banking industry is set up. The first design is to decide the target band of the concentrated market structure, the second design is to concentrate market structure under the reform of property structure, the third design is to implement both entry policy and M&A policy, and the fourth design is to segment market by the product differentiation.