TITLE:
Foreign Entry and Multi-Period Bank Competition Based on Collateral View
AUTHORS:
Xudong Chen
KEYWORDS:
Multi-Period Bank Competition; Collateral; Screening
JOURNAL NAME:
Journal of Financial Risk Management,
Vol.2 No.1,
March
28,
2013
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.