Foreign Entry and Multi-Period Bank Competition Based on Collateral View

Xudong Chen

School of Management and Economics, University of Electronic Science and Technology of China, Chengdu, China.

DOI: 10.4236/jfrm.2013.21001                

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 bank’s 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.

Keywords

Multi-Period Bank Competition; Collateral; Screening

Conflicts of Interest

The authors declare no conflicts of interest.

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