A Research Of Competitive Behaviors In The Retail Banking Market

Retail banking market, a very important part of the banking market, is the arrangement which allows banks, other financial institutions and ordinary consumers, small businesses to conduct a series of banking transactions.The world retail banking market has been mature and growing on a large-scale; retail banking has become the core business and the most important source of banking profits. As a result, a healthy and stable retail banking market is an important contributor to the banking market, as well as the whole economy, in that it can not only transfer saving to investment, thereby stimulating economic growth, but also raises the public's confidence on the banking industry and stabilizes the banking market, since it serves ordinary consumers and small businesses.The most outstanding feature of retail banking market is asymmetric information between banks and borrowers. Small businesses as a part of retail customers are more opaque in information, and as a result, the asymmetric information is more serious. Banks overcome asymmetric information by collecting customers'information and maintaining relationships with them. The consequence of such market competition is to transfer the asymmetric information between banks and borrowers to the asymmetric information between banks. Besides, retail customers lack financial knowledge and the ability to search for information, thus face switching costs while switching from one bank to another. All these features raise banks monopoly power, encouraging them to compete for customer base more aggressively, which could result in excessive competition and thereby reducing allocation efficiency of resources and destabilizing banking market.Therefore, the research of retail banking market: its competitive conditions and competitive behaviors, as well as the competitive consequence,has important implications for banking market health and stability. In addition, protecting the interests of ordinary consumers and small businesses who are in weak position compared with banks is also one of the important reasons for retail bank regulation in various countries.Such research is even more important for China'retail banking market as it is undergoing reform and opening-up. The retail banking market in China has just started up, and it is still quite underdeveloped. Due to very imperfect social credit system, asymmetric information between banks and borrowers is more serious in China, which makes information about borrowers between different banks more asymmetric. More severe asymmetric information will cause banks to be over cautious in lending or more aggressive in competing for high quality borrowers, which could even lead to market disorder. It should be the focus of China's retail banking market regulation to normalize competitive behaviors so as to prevent excessive competition or under competition leading to reduced allocation efficiency of resources and disability of banking market.This dissertation studies competitive behaviors of retail banking market based on discussion of the retail banking market conditions, by combining modern financial intermediation theory and new industrial organization theory. It also discusses China's retail banks competitive behaviors and their characteristics, and puts forward theoretical standard of the degree of competition as well as suggestions to encourage normalized competitive behaviors.This dissertation conducts the research of competitive behaviors in retail banking market by seven chapters. Its main content and structure are as followers:Chapter 1. The theoretical analysis of competitive conditions of retail banking market. This chapter proves that asymmetric information is the basic competitive condition of retail banking market using modern intermediation theory. It also analyzes supply and demand conditions of retail banking market. Focusing on the demand side, it distinguishes demand characteristics of wholesale and retail banking customers, and discusses the switching costs of retail customers and the impact on competitive behaviors in retail banking market.Chapter 2. The theoretical analysis of competitive behaviors of retail banking market. First, this chapter builds a basic model of retail banking loan market, analyzing the competitive behaviors by banks in information production technology and customer relationship and customer base. Then it discusses competition in retail bank product quality by a two-stage model. The paper finds that under asymmetric information and customers'switching costs, banks'customer base and market share in the previous period is the major determinant of their later period profit, and increasing bank product quality by making use of retail customers demand characteristics is one of the important means to expand customer base.Chapter 3. The theoretical analysis of bank mergers and acquisitions in retail banking market. Mergers and acquistions are important competitive behvaviors, they are used by firms to enter a new market or to expand market share in the long run. On briefly reviewing various theories about bank mergers and acquisitions, this chapter believes that there are economic barriers to entry and expansion in the retail banking market, such as asymmetric information and retail customers switching costs, while bank mergers and acquistions are important means to overcome these barriers. Retail customer base and customer information are one of the most important motives for bank mergers and acquisitions.Chapter 4. The development of China's retail banking market and its competitive conditions. This chapter analyzes the competitive conditions in China's retail banking market based on an evaluation of its formation and development stage. After comparing the social credit system environment between China and western countries, it analyzes the characteristics of asymmetric information in China's retail banking market and its impact. It also discusses the supply characteristics by considering the social credit system in China during economic transition, including the characteristics of retail banks and their evolutions, their comparative positions in the market. Besides, it discusses individual customers'relationships with banks and their switching costs by analyzing an important group of retail customers----individual customers. The research finds that China's individual customers face switching costs, which are positively related with individuals'ages and negatively related with their education level. The more satisfied individual customers are with bank services, the higher the switching costs. The above features are the same as individual customers in those of more developed countries. But different from individual customers in more developed countries, individual customers in China maintain shorter relationships with banks, and the longer the relationship, the lower the switching costs. This feature reflects the fact that banks are competing more aggressively for individual customers in China.Chapter 5. The competitive behaviors in China's retail banking market. This chapter analyzes competitive behaviors in China's retail banking market by four typical cases:"the competition of automobile consumption loan market","the competition in small business loan market","the competition of retail banking network", and"the competition in bank cards market". The first two cases reflect retail banks behaviors when facing asymmetric information, while the last two cases focus on bank competitive behaviors in bank product quality and customer base. The research finds that banks in China may behave over caution or over aggressive when facing more severe asymmetric information. Apart from that, when competing for individual customers, banks'behaviors may be non-standardized or in excess.Chapter 6. The study of foreign banks owning shares in China's retail banks. This chapter discusses owning shares of Chinese banks by foreign banks after China's entery into WTO. First, it analyzes the opening-up of China's retail banking market and its great potential, then it explaines the legal and economic barriers to entry facing foreign banks and the importance of owning shares of Chinese banks in overcoming entry barriers. Finally, it compares the advantages and disadvantages of different foreign banks and their choices of market entry. The empirical analysis proves the view put forward in Chapter 3: foreign banks with cost advantage can better overcome adverse selection, and will thus choose to enter China's retail banking market by establishing bank subsidiaries, while foreign banks with no cost advantage face more severe adverse selection, and as a result, they have to enter the market indirectly by owning shares of Chinese banks.Chapter 7. Competition, efficiency and stability in retail banking market. This chapter discusses the reasonableness of proper degree of competition or concentration using economic efficiency and market stability as standards, and explores the relationships between competition and efficiency, competition and market stability. After analyzing the degree of competition in China's retail banking market, the paper puts forward policy suggestions to promote normalized competitive behaviors and increase efficiency and market stability.The dissertation contributes to the research of banking market competition in the following ways:First, it apples modern financial intermediation theory as the guide, and uses the research method of industrial organization. In other words, it regards banks'competition in retail banking business as their competition in retail banking market, so as to borrow the analytical method in industrial organization:"condition----conduct", by fully considering competitive conditions of retail banking market. Only in this way, can we deeply understand the characteristics of competitive behaviors in retail banking market.Second, this dissertation identifies and uses switching costs as a demand condition of retail banking market, and defines"relationship cost"by combining asymmetric information and relationship banking according to the characteristics of retail bank customers. After discussing retail bank customers'switching costs and their impact on market competition, it empirically studies individual customers'switching costs using 735 data from a survey questionnaire from a random sample of individual bank customers in China. The dissertation proves the existence of switching costs, and identifies the factors that affect switching costs. It also compares the switching costs between Chinese and foreign individual bank customers.Third, the dissertation concludes that China's retail banking network cannot fully meet the market demand, after comparing China's retail bank network with that in foreign countries. Then it puts forward the suggestion that banks should try their best to increase efficiency and meet the demand of retail bank customers. Besides, the dissertation analyzes the relationships among market competition, efficiency and stability, theoretically defines the standard of excessive competition, and puts forward the hypothesis that there is a"U"shape relationship between market competition and stability. So it puts forward policy suggestions to normalize competitive behaviors in China's retail banking market.Restricted by the current condition and ability, the dissertation cannot avoid some shortcomings, which are as follows:First, small businesses have their own characteristics. On the one hand, they are more opaque in information, resulting in more severe asymmetric information; on the other hand, banks have more difficulties in collecting and managing their information. In China, small businesses find it very difficult to borrow money from banks, which not only reflects imperfect social credit system, but also weaknesses in banks'property rights, corporate governance and the unique feature of information production technology used in small business loans.Therefore, it is necessary to discuss small business banking market deeply. Due to lack of detail data about small business banking market, this dissertation only has a brief discussion of it, but does not explore it in depth.Second, the dissertation does not analyze pricing behavior in China's retail banking market owing to the fact that there is a lack of retail loan interest rate data, and data about service prices. Besides, the dissertation defines theoretically excessive competition and its foundations, but it does not study the mechanism of excessive competition deeply.