The Relationship Between Competition And Bank Risk In China:an Empirical Research

It is a hotspot for economists to discuss and reflect the cause for financial crisis, till now most of the people blame it to the excessive competition in American banking sector, which leads to the high credit risk and further the crisis. The financial shock did not influence Chinese financial market that much, but still it is a core issue now since China is facing a more opening and competitive financial market. In the end of 2013, The local and foreign currency of Chinese financial institutions within and without China has reached a total of 151000 billion Chinese Yuan, which enjoys a growth of 13.3% from last year; while the insurance and securities industry only have a total asset of 8290 billion and 2080 billion Yuan. In the early time of this year, China has award some private companies the banking licenses, together with deposit insurance and liberalized interest rate under discussion, China will sure facing a more competitive financial market.This paper has reviewed literatures about bank competition and concentration, and then takes Lerner Index as the main measurement, together with HHI, CRn, H-statistic to describe Chinese banking sector. The results show that from year 2003, the concentration degree in Chinese banking sector is decreasing, while the competition degree is increasing volatile. After year 2007 and 2010, the competition degree increased significantly. Joint-stock banks and city commercial banks have the highest competition degree, while state-owned banks and rural commercial banks’ competition are the lowest. Within the 5 biggest national banks, Industrial and Commercial bank and Construction bank have the highest Lerner index, meaning they have greater price monopoly. The empirical research for the relationship between competition and bank risk in China implies that, first, Lerner index has a positive coefficiency with bank risk, which means higher competition degree will induce higher risk. And second, traditional measurements for concentration are also positive with bank risks.This could be the case in China. On the one hand, over 500 commercial banks in the market makes competition in this sector very intensive. And as the differentiation is quite small for the products of each bank, the decreasing of monopoly price power makes banks to take more uncertainty, as well as more risks. On the other hand, Chinese financial market is still not marketized, making the concentration degree quite high. State-owned banks have implicit guarantee and subsidies from government, the "to-big-to-fall" effect may possibly induce moral hazard.The innovation of the paper is that, it models logarithmic cost function and calculates the marginal cost and Lerner index of 126 Chinese banks thus get the only measurement of competition in the bank level. Second, it uses Panzar-Rosse Model to get the H-statistic of Chinese banking sectors, which is used together with Lerner index to describe the market structure and competition of banks in China.