The Diversification And The Efficiency Of Internal Capital Market In China’s Banks

In early 21st Century, under the dual impact of more competitive experienced foreign banks and emerging financial formats such as Internet Finance, China’s banks have to achieve business innovation to enhance the competitiveness based on the traditional profit model. At the same time, with release of the legal regulation, China’s banks began to explore diversified business which has achieved initial success, but there is a big gap between the western countries in terms of the extant of diversification. The discussion on the internal capital market starts from diversified "joint enterprise". AS "specialized" unique enterprises, banks have some obvious characteristics of "diversified enterprise", such as multi-branch, multi-project and multi-region operation.In the process of diversification, China’s banks are bound to form the internal capital market in which capital is allocated between different businesses.This paper discusses the internal capital market about banks in China which field is almost blank up to now, and this is of theoretical significance to enrich the research about the boundary of the internal capital market and the efficiency of the internal capital market. We study the necessity of diversified business of banks from the perspective of internal capital market, especially the relationship between diversification and the efficiency of the internal capital market, which is of great practical significance.Based on the existing literature, through methods combining normal research and the empirical research, this paper attempts to give a definition about the conception of the bank’s diversified operation and bank’s internal capital market. Through a comprehensive analysis about theory about diversified operation causes, scale economy and internal capital market efficiency, considering some actual situation about system background and market environment in China’s bank industry, this paper puts forward to the research hypothesis. The empirical result proves the existence of the internal capital market in China’s bank industry. The further analysis shows that that the higher the degree of diversification in state-owned banks, the higher internal capital market. Based on such empirical results in the end of this paper, this paper also draws some suggestion about the further development of China’s bank diversification and internal capital market operation efficiency.