Research On Trans-regional Operation Of City Commercial Banks In China Based On The Regulatory Perspective

As a significant portion of the financial industry in China, City commercial banks were initially established to support local economy and commerce. Expansion to other regions for business or greater in size was not designed as their goals. However, as city commercial banks have greater needs to grow and regional economies become ever-interconnecting, the model that city commercial banks should focus on one region gradually hinders the further development of city commercial banks. In the past five seven years, we have seen many banks finding new solutions for growth.In2006, Bank of Shanghai established one branch in the City of Ningbo. This particular branch was the first city commercial bank that managed to operate outside its designated region. Since then, many city commercial banks followed. New investment, merger and acquisition or opening city banks have been the typical ways that these city commercial banks could run business outside their region. By doing so, they grew in size and expanded the service network. As the city commercial banks were enjoying the triumph of such expansion, the regulatory authority had to call this a stop in react of a fraudulent bank note incidence by Bank of Qilu. Then, the growth engine for city commercial banks was put into a question mark.Under such circumstance, this paper takes a view from the regulatory authority and research on the trans-regional operation of city commercial banks in China. On one hand, this paper finds out that such trans-regional operation by city commercial banks actually increases their competitiveness, and in the same time, benefits the local economy and financial industry, because such behaviour increases business channels and develops new financial markets as banks find their ways to increase profitability given the deposit interest ceiling.On the other hand, such trans-regional operation behaviour deteriorates imbalance of financial resource among regions:the more developed regions see cluster of financial resources and excessive competition; the less developed regions see absence of financial service. On top of that, the city commercial banks has been expanding to other regions so fast that the banks’risk management system may fall behind, increasing the operational risk and financial market systematic risks. For examples, after some city commercial banks expand to other regions, they imprudently pursue big projects and big clients to achieve the headquarters’quota for the year. Such acts divert from the banks’purpose to serve the local economy and small and medium enterprises.The trans-regional operation for the city commercial banks is significant to future of the banks, the financial industry and even the country’s economy. City commercial banking industry in the United States has valuable relevant experience, one we may study and reference; and this paper will give a thorough study on it.This paper will first introduce the origin, features, and current status of city commercial banks, points out the policy environment, trans-regional operation models and current development of trans-regional operation; and then illustrate the possible issue of such trans-regional operation behaviour from the regulatory perspective. Moreover, this paper will study development of banking industry in the United States after the passage of Riegle-Neal Act and compare this to the current situation of city commercial banking industry in our country. Furthermore, this paper will research the case of Nanchong commercial bank, and apply Economic Scale Theory, Banking Efficiency and City Growth Pole Theory to elaborate whether China’s city commercial banks should run trans-regional operation. In the last part, this paper concludes with some policy suggestion regarding the development of city commercial banks based on the regulatory perspective.