Bank Concentration, Competition And Stability: Empirical Evidence In China

Recently, property right reform of Chinese banks and the entry of foreign banks into China's bank market have been in full swing, along with the change in market structure and competition in banking, they would definitely shock to bank stability to some extend. In the banking industry, as a primary indicator of market structure, concentration take effect on competition, meanwhile, they also exert influences on bank stability from separate standpoints. This paper studies on the impact of national bank concentration and competition on the bank stability, as well as seek to figure out the relationship between concentration and competition in Chinese banking industry.Both theoretical predictions and empirical study on the relationship between bank concentration, bank competition, and bank stability are conflicting, this paper first overviewed latest literatures on this aspect. Applying the traditional industrial organization method, it measured the concentration in Chinese banking industry, and also analyzed the relationship of concentration and market power by theoretical models. Competition is estimated by Panzar-Rosse model using a test statistics H. Furthermore, it developed the bank stability indicator system, and obtained the stability index of 18 sample banks from 1997 to 2005. Then, using panel data of the largest 18 commercial banking in China from 1997 to 2005, the empirical regression find that both concentration and competition positively associated with bank stability even after controlling for macroeconomic variables, financial variables and bank specific variables. Moreover, this result challenged "concentration-less competition" hypnosis, and shows that concentration is not a complete indicator of competition, especially in banking industry.Breaking through the SCP framework, this paper told conduct (competition) apart from market structure (concentration), and measures them separately with structural and non-structural methods. Set stability index of 18 sample banks from 1997 to 2005 as the dependent variable, it integrated concentration and competition into one empirical model, and investigated their irnpacts on bank stability. It may also provide a few empirical evidences for the coming deepen reform in the Chinese banking industry.