JFRM  Vol.2 No.1 , March 2013
Foreign Entry and Multi-Period Bank Competition Based on Collateral View
Author(s) Xudong Chen*
ABSTRACT

This paper constructs the multi-period model of spatial bank competition between the local bank and the foreign bank with financing cost (efficiency) advantage, the results show that: 1) when the amount of the high risk borrowers in the marker reaches a threshold, both banks will use collateral as screening device to distinguish different risk borrowers, only low risk borrowers will borrow money from the bank; 2) the space distance (production differentiation) can help local bank confront the foreign banks cost (efficiency) advantage. Further comparative static analysis shows: the bank’s profit decreases with its financing cost, and the bank will require higher loan rate and less collateral with its financing cost increasing; Decreasing transaction cost and better legal environment will facilitate the bank to require more collateral and lower loan rate.


Cite this paper
Chen, X. (2013). Foreign Entry and Multi-Period Bank Competition Based on Collateral View. Journal of Financial Risk Management, 2, 1-9. doi: 10.4236/jfrm.2013.21001.
References
[1]   Barro, R. (1976). The loan market, collateral and rates of interest. Journal of Money, Credit, and Banking, 8, 439-456. doi:10.2307/1991690

[2]   Besanko, D., & Thakor, A. (1987a). Collateral and rationing: Sorting equilibria in monopolistic and competitive credit market. International Economic Review, 28, 671-689. doi:10.2307/2526573

[3]   Besanko, D., & Thakor, A. (1987b). Competitive equilibrium in the credit market under asymmetric information. Journal of Economic Theory, 42, 167-182. doi:10.1016/0022-0531(87)90108-6

[4]   Bester, H. (1985). Screening vs. rationing in credit markets with imperfect information. American Economic Review, 75, 850-855.

[5]   Claessens, S., Van Horen, N., Gurcanlar, T., & Mercado, J. (2008). Foreign bank presence in developing countries 1995-2006: Data and trends. Working Paper. http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1107295

[6]   Dell Ariccia, G. (2001). Asymmetric information and the structure of the banking industry. European Economic Review, 45, 1957-1980. doi:10.1016/S0014-2921(00)00085-4

[7]   Deng, G.-J., Zeng, Y., Li, Q., & He, J. (2012). Strategic cooperation decision of the foreign bank and China’s bank. Journal of Management Sciences in China, 15, 71-85.

[8]   Gormley, T. (2007). Cost information, foreign entry and credit access. Working Paper, St. Louis: Washington University.

[9]   Hainz, C., Weill, L., & Godlewski, J. (2008). Bank competition and collateral: Theory and evidence. Bank of Finland Research Discussion Papers.

[10]   Hauswald, R., & Marquez, R. (2003). Information technology and financial services competition. The Review of Financial Studies, 16, 921-948. doi:10.1093/rfs/hhg017

[11]   Hauswald, R., & Marquez, R. (2006). Competition and strategic information acquisition in credit markets. The Review of Financial Studies, 19, 967-1000. doi:10.1093/rfs/hhj021

[12]   Lehner, M. (2008). Entry of foreign banks and their impact on the host countries. Journal of Comparative Economics, 36, 430-452. doi:10.1016/j.jce.2008.02.002

[13]   Lehner, M. (2009). Entry mode choice of multinational banks. Journal of Banking & Finance, 33, 1781-1792. doi:10.1016/j.jbankfin.2009.03.009

[14]   Li, Q., Zeng, Y., & Liu, B. (2010). Foreign entry and multiple-stage credit competition in bank industry: A steady-state model. China Economic Review, Forthcoming.

[15]   Sengupta, R. (2007). Foreign entry and bank competition. Journal of Financial Economics, 84, 502-528. doi:10.1016/j.jfineco.2006.04.002

[16]   Sengupta, R. (2009). Lending to uncreditworthy borrowers. Working Paper, Federal Reserve Bank of St. Louis.

[17]   Zhu, Y.-Y., Zeng, Y., Li, P., & He, J. (2008). Introducing foreign strategic investor into Chinese banks: Background, debate and review. Management World, 1, 22-37.

 
 
Top