How Does Foreign Entry Affect Domestic Banking

With the development of economic integration and the entry of the Word Trade Organization, the bank sector of China began to open the market fully, many foreign banks set up new companies or branches in China. Our country performed its WTO commitments, cancelled restricts on foreign banks, and permitted foreign banks to do RMB business. The Regulations of the People’s Republic of China on Foreign Banking Regulations had passed in2006, opened the RMB business to foreign banks. China witnessed a great increase in foreign bank participation. The foreign bank usually used2manners to enter into China market, direct investment and acquired investment. In China foreign banks set up their branches or local incorporations, they also acquired local banks to enter the domestic country. Many well-known foreign banks adopted acquired investment, due to restricts on size and timing. The entry of foreign bank will affect our domestic banks, take account into their advantages in management, efficiency, technology. This paper studied the impact of foreign bank entry on China bank’s net interest margin.I empirically analyzed net interest margins, augmented the model on the basis of dealership model brought by Ho and Saunders and its augments by other scholars. Incorporated three dummy variables into the model, they are dummy variables which used to distinguish time, bank property, and foreign bank entry mode. Using financial data of100commercial banks in China mainland between2003-2010, and investigated these three questions. First, after the foreign bank entry, does net interest margin of domestic banks has changed or dose the foreign bank participation bring competition to Chinese bank? Second, does there exists difference between domestic banks and foreign banks in net interest margin or does the foreign bank bring advanced management by contrasting the net interest margin of foreign bank with domestic bank. Third, which mode of the foreign bank entry is efficient by distinguish the foreign bank participation manners, or adopted which mode the foreign banks can enjoy higher net interest margins in China. We find that the entry of foreign bank doesn’t bring competition and the advanced technology in Chinese banking sector, it’s favorable to the foreign bank enter the Chinese market adopt indirect investment. In the end, I bring forward proposals or strategies, in order to make our domestic banks to deal with the challenge of foreign bank entry.The paper has6parts, it structured as follows. In the first chapter, states research backgrounds, aim, significance, literature review about the determinants of net interest margin and the impact of foreign bank entry on domestic countries’net interest margin. In the second chapter, on the basis of literature review in the first chapter we analyze the determents of net interest margins. In the third chapter, introduces the panel data model and builds panel data model based on the determinants of net interest margin in the second chapter. In the forth chapter, make an introduction on data and empirical analysis on the impacts of the foreign bank entry on China bank’s net interest margin. Five chapter states the conclusion.