The Influence of Market Concentration on Bank Performance and the Test of TBTF Behavior in China

Abstract

There are 16 listed commercial banks in total in China. Based on the annual specific data of those banks in China from 2008 to 2013, this research intends to find out how bank size and market concentration affect its market efficiency. This paper aims to test whether there exists a TBTF (Too Big to Fail) behavior in China. However, there is no clear evidence which shows that Chinese systemically important banks have a higher fragility than other banks. The results show that systemically important banks perform better than others on cost and profit efficiency and do not take too much risks under the same condition, even in a concentrated market where there are few dominant large banks and the majority of banks are in small size. However, regards to assets, if a banking market is highly unequaled, it does harm to smaller banks’ performance and increases the instability of the whole banking system. The study argues that regulators should make an adjustment on market concentration according to reducing the gap of bank size between large and small banks, other than limiting the size of systemically important banks.