A Study On Development Path And Efficiency Of U.S.Community Banks In Financial Disintennediation

The development of local banks in China is in its infancy. In order to deal with the increasingly serious impact of the financial disintermediation, we should conduct in-depth studies not only on Chinese banking system according to national conditions, but also on other countries’experience broadly. This article focuses on community banks in the United States, where financial disintermediation has a history of nearly50years. Under the influence of the financial disintermediation, the U.S. banking system has experienced two major waves of mergers and innovation, which seriously threatened the survival of community banks. Even so, many community banks still survive and get better development.Based on financial disintermediation theory, industrial organization theory and the new institutional economics, the author analyzes the mechanism of the influence on community banks of financial disintermediation, the efficiency and relatively efficient scale and innovative strategies of community banks, and the possibly inspiration for Chinese local banks.The emergence of any new born things has its genesis and process of evolution. The author firstly defines the concept of financial disintermediation and community banks, then makes literature reviews of the financial disintermediation theory and its connection with the development of the banking industry, as well as the efficiency theory of banking. The history of U.S. financial disintermediation is divided into three stages:the emergence stage, the deepening stage and the re-disintermediation stage. In the deepening stage of the financial disintermediation, the banking sector in the United States saw intensified competition, as well as the deregulation. Community banks were exposed to the direct competition from the large national and regional banks, facing the hard choice of whether to do interstate expansion through mergers and acquisitions and how to deal with the innovation booms.The viability of a bank depends on its efficiency. Inefficient banks will gradually be eliminated in the competition. By measuring the static Technical Efficiency and the dynamic changes of Total Factor Productivity of the U.S. community banks with the DEA-BCC model and Malmquist Index analysis method, the author finds that instead of asset expansion, it is technology that matters for the improvement of community bank efficiency.On the basis of the analysis of bank efficiency, the author does theoretical and practical research on the relationship between bank efficiency and the scale factors as well as innovation factors, through the theory of scale economy of banking, incentives mechanism, bandwagon pressures of financial innovation and Hotelling spatial competition model. Four propositions are put forward. First, the scale economies of community banks and large banks are quite different due to the different market positioning and information processing. Second, the scale of community banks has an inverted U-shaped relation with bank efficiency. Third, Improvement in bank efficiency can be achieved by deepening the traditional business services and importing differentiation. Fourth, Community banks of different scale have different demands for innovation, so their innovation will differ in directions. To verify the above four views, with the regression analysis method, the author used Tobit model to analyze the scale factors and innovation factors of community banks.Under the impact of the financial disintermediation, some community banks survived and made profit successfully, not only due to its correct development strategy, but also its strict risk control system.The risk control system can be pictured as a series of concentric circles, which consist of Management Information System, internal controls and effective supervision. These interconnected circles are featured by concentrated equity, higher core capital ratio, core deposits, relationship loans, coordination of supervision agencies and multiple regulatory methods.American Community Bank’s practice of development is helpful for Chinese local banks. The paper explores the inspiration in the last. Chinese government should further guide private capital to enter the area of local commercial banks, and gradually reduce the degree of government intervention.Local banks should clarify the structure of property rights, improve corporate governance, and make characteristic and differentiated strategic positioning based on its community. Furthermore, the expansion of local banks should be limited by their management capabilities.The main originalities of this paper are as follows:First, instead of from the angle of relationship loan, the author studied community banks by taking financial disintermediation into consideration, and risk control and development path are also discussed in that way. This can broaden the horizon of the researchers studying on this issue, and at the same time the process of how financial disintermediation affects community banks is clarified. Second, the author analyzed what the optimum scale of a community bank is. By empirical test, the author found that the optimum scale of a community bank has a constrained boundary. Besides, unlike the previous theories that are based on the premise that all the banks have the same economies of scale, the author studied theoretically on the economies of scale of banks. Third, the author tried to classify community banks by their different scale, and then found that community banks of different scale differs greatly in constraint condition. Furthermore, such difference will make community banks have various demands for innovation, and this may give insight to the local commercial banks in China, so that they can choose a better innovation strategy.