Finance for growth: Policy choices in a volatile world. However, these observations have lower NPL ratios, lower capital adequacy ratios, and lower ROE.

Regional protectionism and market segmentation: From the perspective of developments strategy, Working paper no.

2008).

A fragmented China: Measure and determinants of Chinese domestic market disintegration. 1. (2012). Second, we find some possible explanations for the results based on the Chinese context.

Berger et al. Second, compared with state-owned city commercial banks, non-state-owned city commercial banks are more likely to perform worse. Finally, a good way to thrive in the target market is to implement different competitive strategies and elude conflict with state-owned banks and joint-equity banks. Chong, B. S. (1991). Cite this article. Meanwhile, city commercial banks should focus on local businesses, avoiding blind expansion to achieve a larger market share.

Local protectionism and regional specialization: A model and econometric evidences. Furthermore, the banks regulatory rating had to be above Grade 2 (including Grade 2).Footnote 10. In April 2009, the CBRC issued a document titled Adjustment Comment on the Market Access Policy of Setting Up Branches for Small- and Medium-Sized Commercial Banks, which allowed the establishment of new branches in the province in which the bank is headquartered.

Levy-Yeyati, E., Martinez, P., & Schmukler, S. (2004). Journal of Financial Research, 6, 127141. Thus, six banks areclassified as large state-owned commercial banks. Review of Economic Studies, 51(3), 393414. Moreover, we conduct some mechanism tests in the Chinese context.

In September 1983, the PBC was formally reconstructed as the central bank, conducting national macroeconomic policymaking, monetary stabilization, and financial development functions. The razors edge: Distortions and incremental reform in the Peoples Republic of China. Quarterly Journal of Economics, 101(2), 229264. Journal of Money, Credit and Banking, 29(3), 300313. Thus, city commercial banks should pay particular attention to their local markets and concentrate on serving the local economy.

According to the gravity-deregulation model, we select an exogenous variable: distance. Our baseline results suggest that geographic diversification of banks decreases their performance but increases their market share. 1997; Hughes et al. The big four banks include the Construction Bank of China (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), and Industrial andCommercial Bank of China (ICBC).

Accordingly, the CBRC deregulated the regional restrictions of city commercial banks. Schotter, A. P., Mudambi, R., Doz, Y. L., & Gaur, A. Harvard University Press. (2007). This result is different from the existing research in the American market (Berger et al. We construct four proxies to measure bank performance: ROA, ROE, NPL ratio, and operating cost. Frontiers of Business Research in China To create the predicted value, we iterate the coefficient estimates in column (1) of Table 2 and obtain the projected value of city commercial banks branches in other cities for each year. Geographical diversification, bank holding company value, and risk. Geographical diversification has different effects on large and small banks (Berger et al. The bank capital decision: Time seriesCross section analysis. Compared with large banks, small banks prefer to offer high interest rates and over lend to enhance their competitiveness, possibly increasing risk (Franklin and Douglas 2000). Credit rationing in markets with imperfect information. The principles of economic planning. The consolidation of the financial services industry: Causes, consequences, and implications for the future. Table1 presents the sample descriptive statistics. Then, we calculate the probability of a city commercial bank entering the target market to establish subsidiaries based on the gravity-deregulation model following Goetz et al. Journal of Monetary Economics, 20(3), 501520. However, rural commercial banks and rural cooperative banks have not been allowed to operate cross-regionally. In an oligopoly market, large-sized companies are likely to conspire together for higher profits (Bain 1956; Demsetz and Strahan 1973; Demirg-Kunt and Harry 1999). (2011). Google Scholar. This means that a higher level of a banks predicted geographical diversification is positively associated with actual bank geographical diversification at the 1% level. $$, $$ {Y}_{i,t}=\alpha +\gamma \left(1- HHI\right)+{\gamma}_1 Protect+{\gamma}_2\left(1- HHI\right)\times Protect+{X}_{i,t}+{\delta}_i+{\tau}_t+{\varepsilon}_{i,t}, $$, https://doi.org/10.1186/s11782-021-00104-x, http://xukezheng.cbrc.gov.cn/ilicence/licence/licenceQuery.jsp, http://www-cnrds-com-s.vpn.ruc.edu.cn/Home/Index#/AllDatabase, http://www-gtarsc-com.vpn.ruc.edu.cn/SingleTable/DataBaseInfo?nodeid=23, http://zhuanti.cbrc.gov.cn/subject/subject/nianbao2008/2.pdf, http://www.pbc.gov.cn/bangongting/135485/135495/135499/2833451/index.html, http://www.cbrc.gov.cn/chinese/home/docView/2858.html, http://www.cbrc.gov.cn/chinese/home/docDOC_ReadView/301.html, http://creativecommons.org/licenses/by/4.0/. In this part, we estimate the relationship between geographical diversification and city commercial banks performance using ordinary least squares (OLS) regressions. (1986). Section 6presents the results of mechanistic research and cross-sectional analyses. We also use some bank-level accounting variables as controllers or alternative measures in the following empirics: loan ratio, asset ratio, capital ratio, asset quality, GDP of bank headquarters, bank age, and bank size. What drives performance? By using this website, you agree to our (3) and divide our sample into two subsamples by city commercial banks ownership. City commercial banks were permitted to establish new branches in other cities within the province where the bank is headquartered. We select bank characteristics, including size, age, capital adequacy, NPLs, and non-interest income. The results show that city commercial banks geographic diversification has a negative relationship with performance but a positive and significant relationship to market share. In the existing literature, geographic diversification is implemented by banks themselves, as in the case of bank holding companies in the US. Lin, Y., & Liu, P. (2004). Governing China's local officials: An analysis of promotion tournament model. These studies consider that geographical diversification could enlarge scale economies, relieve political risk, and increase the market control of banks. Does geographic diversification increase or decrease banks performance? The existing literature discusses the causes of geographic diversification and focuses on the perspective of informal institutions. Marcus, A. J. Parliamentary election cycles and the Turkish banking sector. This method is relatively exogenous. (2003). Endogenous conditions and competitive effect of the establishment of local financial institutions in China: An analysis of the county banks using spatial Probit model. Journal of Finance, 60(1), 231266. Journal of Finance, 51(5), 17151742. Based on the deregulation of the geographic restrictions on city commercial banks since 2006, only eligible city commercial banks can be cross-regional and apply for the CBRC's approval. Wong, C. (2003). Section 3illustrates the data and summary statistics.

(2) Other mechanisms may explain the results of this study for the Chinese market.

Additionally, the target market may reject the application of other city commercial banks to set up a branch, as the new branches of other city commercial banks will increase the competitiveness of the local banking industry. We received very helpful comments from anonymous referees. Li, G. (2014). 1997; Kuppuswamy and Villalonga2016), or reducing exposure to idiosyncratic local shocks (Diamond 1984). To overcome these challenges, we improve this research as follows: First, we develop and implement the gravity model to identify the causal impact of the geographic diversification of city commercial banks branches on their performance. 2010; Cornett et al. Journal of Political Economy, 108(1), 133. Why government banks underperform: A political interference view. Market discipline in emerging economies: Beyond bank fundamentals. This index includes larger values for higher degrees of geographical diversification. 2013; Wang et al. According to the institution-based view, to legitimize corporate behaviors, enterprises need to make strategic behaviors that cater to institutional requirements, possibly leading to organizational convergence or organizational efficiency obstruction (DiMaggio and Powell 1983; Meyer and Rowan 1977).

Porta, R. L. (2012). We employ a Logit model to estimate model (1). There are two types of commercial banks with geographical operational restrictions: city commercial banks and rural commercial banks. We find that the external environment and market structure in the target market reduce city commercial banks performance. In this specification, 1 indicates whether the banks geographical diversification influences their performance. Second, the government should pay more attention to local protectionism, as it leads to market segmentation and harms resource allocation. Journal of Money, Credit and Banking, 40(6), 12171238. According to the WTO rules, China needed to open up the banking market to foreign financial institutions in 2006. (2006). (2013). Proxy denotes alternative measures of city commercial banks geographical diversification, including 1HHI, average distance, and a diversification dummy.Footnote 11i is bank fixed effects; t is year fixed effects; and i, t is the residual. From 2006 to 2016, the proportion of the assets of the city commercial banks to thetotal scale of the banking industry increased from 6.4% to 12.2%.

Hu, J., & Guo, F. (2013). Quarterly Journal of Economics, 115(4), 10911135. In the preliminary tests, we control only for the year and city commercial bank fixed effects. Third, city commercial banks should consider the market structure and administrative factors of the target market. Kuppuswamy, V., & Villalonga, B. Terms and Conditions,

World Bank (2001). Zhou, L. (2004b).

Li, X., Song, C. Does the target market affect bank performance? Contemporary Finance & Economics, 12, 5965. All variables are winsorized at the 1% and 99% levels to eliminate outliers. Institution-based views include two fields: a formal institution and an informal institution. In this circumstance, the local government support is instrumental. The city-level specific variable uses the GDP of the banks home city. All errors are ours. Finally, cross-sectional analyses show that the impact of geographical diversification on banks performance is more notable among city commercial banks that are younger, and have a lower capital adequacy ratio and a higher non-performing loan ratio. Open Access This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. International Regional Science Review, 22(3), 251281. Journal of Financial Economics, 120(2), 346362. Does the target market affect bank performance? This study establishes a model of the influence of geographical diversification on the market share of banks. (2012) use financial data on 104 city commercial banks from 2004 to 2009.

The development of city commercial banks has been deemed important by local governments as they are only financial resources that local governments can directly control (Guo 2014; Guo and Xiong 2018; Zhou 2004a; 2004b; 2007). This instrumental variable might be more exogenous and suitable for the Chinese background. Finally, our sample includes 91 banks and 933 bank-year observations from 2006 to 2016. In the results for the first stage presented in Panel B of Table 5, the index of (1Predicted HHI) is positive and significantly associated with the actual degree of diversification at the 1% level. Please refer to the document of PBC [1997] No. Chinas commercial banking system also includes over one thousand rural commercial banks. Journal of Financial Economics, 46(2), 135164. Cai (2016) uses a sample of joint-equity commercial banks and city commercial banks.

The model specification is as follows: where Yi, t denotes the performance of city commercial bank i in year t, and bank performance includes four variables: ROA, ROE, NPL ratio, and cost.

After April 2009, geographic restrictions were further deregulated, and the number of city commercial banks increased dramatically. Boston College. In Paper presented at the work-shop on national integration. Thirdly, although our major contribution is to propose a new perspective based on the Chinese context, we also overcome endogeneity problems. City commercial banks were able to open branches freely in the province where their headquarters was located.

(2012) and Li (2014) use the Heckman selection model (without IV) to overcome sample selection bias. An empirical challenge in this research is that geographical diversification may be endogenous, meaning there may be unobservable variables that affect both bank geographical diversification and performance. MIT Press. Detailed information is shown in Fig. Identifying the valuation effects and agency costs of corporate diversification: Evidence from the geographical diversification of U.S. banks. China has been experiencing a transition from a planned to a market economy since the 1979. The impact of corporate governance on performance differences in privately-owned versus government-owned banks: An international comparison, Working paper. (2010). Local governments transfer the financial resources of city commercial banks to local enterprises by controlling city commercial banks (Guo and Xiong 2018). We calculate this value following Hu and Zhang (2005) and use the proportion of enterprise income tax as local fiscal revenue.Footnote 13. However, the deregulation in China provided a policy-driven geographic diversification of banks. Therefore, we examine potential explanations for these results in the Chinese market. Determinants of commercial bank interest margins and profitability: Some international evidence. According to our empirical results, in addition to the reasons for the scale effect and internal controls, the external environment, market structure, and ownership structure of banks also impact bank performance after geographic expansion. The result indicates that the instrument could explain diversification at the city commercial bank level. The incentive and cooperation of government officials in the political tournaments: An interpretation of the prolonged local protectionism and duplicative investments in China. Columns (1) to (5) report the results for a subsample with a large number of state-owned banks and joint-equity banks, and columns (6) to (10) report the results for a subsample with a small number of these banks. (1983). Demsetz, R. S., & Strahan, P. E. (1973). 1997; Kuppuswamy and Villalonga 2016). Review of International Economics, 13(3), 409430. Privacy XL and CS designed the study. We distribute the full sample into two subsamples: diversified and non-diversified banks. The coefficient estimates of the interaction terms are negative and significant at the 1% level. Panel D of Table 9 suggests that geographic expansion by higher NPLs contributes to worse bank performance, while the impact on the performance of banks with lower NPLs is insignificant. Oxford University Press. From 2006 to 2009, for observations in which city commercial banks did not meet the quantitative standard, we set the projected share equal to 0. Journal of Banking & Finance, 34(11), 27092719. Zhou, L. (2004a). The fundamental institutions of Chinas reform and development. A., Linck, J. S., & Smith Jr., C. W. (2003). However, the market share of city commercial banks in the subsample with a small number of state-owned banks and joint-equity banks is more significant than that for the subsample with several of these banks both economically and statistically. In 2006, the CBRC allowed only qualified city commercial banks to establish cross-regional branches; however, this standard was not disclosed to the public. Unlike the big five state-owned commercial banks and joint-equity banks which can establish branchesin the whole country, the branches of city commercial banks are confined to their home city.Footnote 2 In February 2006 and April 2009, the China Banking Regulatory Commission (CBRC) deregulated the cross-regional operations of city commercial banks. Local financial institutions and regional economic growth: A quasi-natural experiment of city commercial banks in China. Akhigbe, A., & Whyte, A. M. (2003). Unlike Wang et al. Journal of Economic Literature, 49(4), 10761151. Banks with a capital of USD25 million to USD500 million could experience improved performance due to the expansion. Li (2014) uses bank financial data from 2008 to 2012, including 106 city commercial banks, 69 rural commercial banks, and 39 rural cooperative banks.