Welfare Study On Opening-up Of Banking In Developing Countries

Opening-up of banking and its effect is a worldwide academic and practical project. A host of new problems are emerging in an endless stream in lots of countries, especially the opening of developing countries' banking is a new challenge to the theoretic research and practice because of its particularity and complexity. This dissertation applies industrial organization theory to the research on this issue, deepening our understanding of the opening-up of developing countries' banking and its effect, and provides a new theoretic platform for analyzing and resolving problems in this process.Starting with the vision of banking organization structure, focusing on the welfare effects of banking' opening up, this dissertation investigates the welfare of banking under the condition of complete monopoly, domestic opening up (Cournot Competition among domestic banks) and opening up to foreign capital (Cournot competition between domestic and foreign banks) respectively. By this comparison, I come to the conclusion that even in a closed banking market, the increasing competition will improve the efficiency of banking system and social welfare level. This can also explain why the banking in developing countries will firstly be opened to domestic capital. However, due to the insufficient competition of bank market in these countries, improvement of efficiency is usually limited. So the opening-up of banking to foreign investors is extremely meaningful. Under the assumption that foreign banks are more competitive than domestic banks, I deduce that even they have the same cost and credit risk, the former has an advantage in capital source, from which consumers can benefit a lot. After the entry of foreign banks, the effectiveness of host country's monetary policy has been decreasing. I also propose that foreign monetary policy will affect domestic economy through credit rate. At last, I find that the asymmetry of cost efficiency and credit risk between foreign and domestic banks might be a key factor to support the entry of foreign banks for developing countries. Using a sample composed by of 353 banks in 11 mid-and east European countries, my positive analysis proved that foreign banks actually are more efficient. Additionally, their entry can also accelerate the whole efficiency of the banking and lessening the margin, as well as reducing profitability of domestic banks and providing more credit. In summary, although the entry of foreign banks will reduce profit of domestic banks, there is positive effect for the whole economy. Based on forward analysis of banking opening, I analyze the current research documents about the relationship between the competition of foreign banks and stability of banking system in host countries, finding that the entry of foreign banks might have both negative and positive effects on the stability of host countries' banking system. Some practical experiences have shown that the entry of more foreign banks can make the banking system more stable and decrease the fluctuation of credit, although these evidences are still limited.Finally, the thesis focuses on the process and practice of opening-up of Chinese banking. By the welfare effect analysis, the author shows the necessity of deepening the reform of Chinese banking, ways to develop competence and improve the performance of Chinese banking.