The impact of foreign bank penetration on the domestic banking sector: new evidence from China

This study proposes a foreign bank branch networks index (FBBNI) to capture bank-level exposure to competition from foreign banks in terms of geographical proximity. The index takes account of the rapidly expanding branch networks of both foreign and domestic banks in China. Based on data from a sample of three types of Chinese commercial banks from 2002 to 2011, we find that exposure to the branch networks of foreign banks is associated with improved profitability at domestic banks, higher efficiency, and increased non-interest income, consistent with knowledge transfer from foreign banks. These relationships are most pronounced for joint-stock domestic banks presumably because their ownership structure fosters knowledge transfer.

[1]  Hairul Azlan Annuar,et al.  Foreign investors' interests and corporate tax avoidance: Evidence from an emerging economy , 2015 .

[2]  Antonio Fatás,et al.  Regional labor market dynamics in Europe , 1995 .

[3]  Shelagh A. Heffernan,et al.  Cost X-Efficiency in China's Banking Sector , 2005 .

[4]  Allen N. Berger,et al.  Bank Ownership and Efficiency in China: What Will Happen in the World's Largest Nation? , 2006 .

[5]  M. Feldman,et al.  Knowledge spillovers and the geography of innovation , 2004 .

[6]  Robert Lensink,et al.  The short-term effects of foreign bank entry on domestic bank behaviour : Does economic development matter? , 2004 .

[7]  Robert Cull,et al.  The Effect of Foreign Entry on Argentina's Domestic Banking Sector , 1999 .

[8]  James D. Adams,et al.  Comparative Localization of Academic and Industrial Spillovers , 2001 .

[9]  Ying Xu.  Towards a more accurate measure of foreign bank entry and its impact on domestic banking performance: The case of China , 2011 .

[10]  Michael F. Martin.  China's Banking System: Issues for Congress [February 20, 2012] , 2012 .

[11]  Stijn Claessens,et al.  How Does Foreign Entry Affect the Domestic Banking Market? , 1998 .

[12]  Yizhe Dong,et al.  Impact of Foreign Bank Entry on the Performance of Chinese Banks , 2013 .

[13]  A. Kokko,et al.  Multinational Corporations and Spillovers , 1998 .

[14]  Wilbur Chung.  Mode, Size, and Location of Foreign Direct Investments and Industry Markups , 2001 .

[15]  A. Garcia-Herrero,et al.  Does the Chinese Banking System Benefit from Foreign Investors? , 2008 .

[16]  David A. Grigorian,et al.  Determinants of Commercial Bank Performance in Transition: An Application of Data Envelopment Analysis , 2002, SSRN Electronic Journal.

[17]  M. Firth,et al.  Ownership Structure and Risk-Taking: Comparative Evidence from Private and State-Controlled Banks in China , 2014 .

[18]  Chung-Hua Shen,et al.  Impact of Foreign Bank Entry on the Performance of Chinese Banks , 2009 .

[19]  R. Steiner,et al.  The impact of liberalization and foreign investment in Colombia's financial sector , 2000 .

[20]  Wei Li,et al.  The growth, determinants, and profitability of nontraditional activities of Chinese commercial banks , 2016, The Chinese Capital Markets.

[21]  Wilbur Chung.  Mode, Size, and Location of Foreign Direct Investments and Industry Markups , 2001 .

[22]  Shujie Yao,et al.  On China’s Monetary Policy and Asset Prices , 2011 .

[23]  G. Ferri,et al.  Are New Tigers supplanting Old Mammoths in China's banking system? Evidence from a sample of city commercial banks , 2009 .

[24]  T. Feyzioğlu,et al.  Does Good Financial Performance Mean Good Financial Intermediation in China? , 2009 .

[25]  Jeffrey M. Wooldridge,et al.  Introductory Econometrics: A Modern Approach , 1999 .

[26]  David A. Grigorian,et al.  Determinants of Commercial Bank Performance in Transition; An Application of Data Envelopment Analysis , 2002 .

[27]  A. Unite,et al.  The effect of foreign entry and ownership structure on the Philippine domestic banking market , 2003 .

[28]  I. Hasan,et al.  A Note on Foreign Bank Entry and Bank Corporate Governance in China , 2012 .

[29]  R. Lensink,et al.  Banking in transition economies: does foreign ownership enhance profitability? , 2008 .

[30]  N. Hermes,et al.  Foreign Bank Presence, Domestic Bank Performance and Financial Development , 2004 .

[31]  M. C. V. Manlagñit.  The economic effects of foreign bank presence: Evidence from the Philippines , 2011 .

[32]  Sang-Bum Park,et al.  An Empirical Study on the Impacts of the Chinese Banking Industry by Foreign Banks' Entry , 2012 .

[33]  R. Kroszner.  On the Political Economy of Banking and Financial Regulatory Reform in Emerging Markets , 1998 .

[34]  Todd A. Gormley.  The Impact of Foreign Bank Entry in Emerging Markets: Evidence from India , 2007 .

[35]  Victor C. Shih,et al.  Comparing the performance of Chinese banks: A principal component approach ☆ , 2007 .

[36]  Guonan Ma.  Sharing China's Bank Restructuring Bill , 2006 .

[37]  Chunxin Jia.  The Effect of Ownership on the Prudential Behavior of Banks - The Case of China , 2006 .

[38]  Henry S. Terrell.  The role of foreign banks in domestic banking markets , 1984 .

[39]  Allen N. Berger,et al.  The Efficiency Cost of Market Power in the Banking Industry: A Test of the Quiet Life and Related Hypotheses , 1998, Review of Economics and Statistics.