Jun Wu (Shanghai Jiao Tong University) - Foreign Bank Entry and Bank Efficiency: Evidence from China

Jun Wu (Shanghai Jiao Tong University) - Foreign Bank Entry and Bank Efficiency: Evidence from China

Co-authors: Yin-Wong Cheung (City University of Hong Kong) and
Chun-Yu Ho (University at Albany, SUNY)

Abstract
We construct two bank-specific measures of exposure to foreign banks; namely, branch presence and minority ownership to study the effects of foreign bank entry on bank efficiency in China based on a sample of 91 Chinese banks over the period 2002-2013. We adopt an empirical approach that is valid in the presence of unobserved factors that influence the bank efficiency and the exposure to foreign banks, and the unobserved heterogeneity of bank efficiency. There are two main findings. First, domestic banks with a larger exposure to foreign bank branches experience a lower level of profit efficiency. The profit efficiency decline is due to the worsening of interest income efficiency outweighs the improvement in non-interest income efficiency. Also, foreign banks being less familiar with local market present weaker competition to domestic banks, and with a higher profitability provides a stronger positive spillover to domestic banks. Second, foreign banks with a lower solvency risk and coming from countries with different culture from host country yield a stronger positive partial ownership effect to domestic banks they invested in by improving non-interest and interest efficiencies.

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