Research On Impact Of Bank Competition On Risk In China

Financial system plays a more important role in promoting economic development, hence, how to maintain the stability of financial system is a key point for every economies. The structure of finance is bank-oriented in China,therefore maintaining the stability of the banking system is of importance. As is studied, bank competition has an influence on risk, however, economists fail to reach an agreement on the impact direction. So it is necessary to clarify the reality of the relationship between them in our country and different performance of different types of banks, which can provide some policy suggestions in terms of risk management and regulation.Based on the franchise value theory, risk-shifting theory and U-shaped relationship theory, from the perspective of heterogeneity, through the qualitative analysis and quantitative analysis,this paper studies the relationship between bank competition and risk in our country and examines the different performance of two kinds of banks on the relationship. In the empirical part, we use HHI index and Lerner index to measure bank competition and use non-performing loan ratio to measure risk. Based on 2007-2014 panel data of 17 commercial banks in China, we use the fixed effects model with the Driscoll- Kraay robust standard to test the differences between state-owned commercial banks(SOCBs) and joint-stock commercial banks(JSCBs).The results indicate that there exists a U-shaped relationship between bank competition and risk and that different types of banks do have different performance on the relationship. Firstly, for the SOCBs, competition will improve their stability; for the JSCBs, competition will hamper the stability. Secondly, improved profitability will enhance the stability; Thirdly, economic prosperity(recession) will lead bank risk to decrease(rise) and loose(tight) monetary policy will increase(reduce) the bank’s risk, to which the authorities need to pay attention.Finally, this paper provides some suggestions for the authorities. First of all, standardize the order of the banking competition, in case that vicious competition leads to great risks in commercial banks. Secondly, guide different types of banks to implement differentiation strategies, including the market segmentation and service differentiation strategies;pay close attention to bank risk of downturn, and be prudent in making monetary policy.