Foreign entry and bank competition on financial products in China: A model of bank size

Abstract

The bank branches act as the main sales channels for financial products in China, the size of which affects the bank's competition for the financial products. In addition, the information asymmetry among investors, banks, and financiers will influence the choice of investors, thereby affecting the competition. Focusing on bonds, this paper establishes a competition model of the banks' financial products based on their outlets. The research shows that the quality of private information and the number of the branches are critical to the market competition between banks, and that banks with larger sizes can better utilize private information. Hence, banks with smaller outlets can gain greater competitiveness by revealing private information, which will force other banks to disclose private information, thus facilitating the transparency of information in the financial products market. When all banks reveal their proprietary information, the banks with better information quality will remain competitive. The study indicates that foreign banks' future investment in the branches and their fairer way of competing will force the local Chinese banks to gather and reveal their private information, enhancing their transparency.