Rise of Bank Competition: Evidence from Banking Deregulation in China

Using proprietary loan-level data and detailed bank branch data in China, this paper investigates the effects of the 2009 bank branch deregulation on competition dynamics between new and incumbent banks and on real economic activities. Tracing out each of the loans firms borrowed, we find that new entrant banks tend to target different firms than incumbent banks (e.g., more efficient firms). Increased interbank competition leads to more relationship bank lending than transaction lending. Loans from new banks have longer maturity, better internal ratings, more third party guarantees, and lower delinquency rates. When competition pressure is higher, incumbent banks provide better loan terms, lower loan-screening standards, and have higher delinquency rates. Overall, increased interbank competition leads to increases in firm investments, employments, sales, and efficiency, especially for private firms. Moreover, interbank competition leads to greater added value of bank loans for firms which depend mainly on transaction lending than for firms which mainly borrow relationship loans.