| Commercial banking sector has long been a core of the financing system in China, playing a key role in China’s rapid development. Accordingly, research on the correlation between commercial banking market structure, efficiency and performance possesses quite significant sense in both theory and realism. With the SCP Paradigm of industrial organization theory, this paper discusses the correlation of market structure, efficiency and performance of Shanghai commercial banking from the theoretical and empirical perspectives.Western researchers have proposed two hypotheses, Market Power Hypothesis (MPH) and Efficient Structure Hypothesis (ESH) based on a lot of researches. The MPH believes that the banking performance is determined by the bank conduct which is determined by the banking market structure. However, ESH argues that there is no direct causal relationship between market structure and banking performance. It is efficiency that affects the banking performance and market structure. Researches on Europe and the United States banking sector haven’t come to an agreement but do show some evidence to support either the MPH or the ESH.Researches on the correlation between Chinese banking market structure, efficiency and performance have denied both of the two hypotheses. But taking into account the imbalance in development of China regional economy, we cannot safely apply the findings based on the national level to a specific region like Shanghai. Therefore, it is necessary to analyze the correlation between Shanghai Banking market structure, efficiency and performance.This paper selects Concentration Ration and the Herfindahl index as the measure of Shanghai banking market structure, and then analyzes the bank efficiency based on Data Envelopment Analysis method. It turns out that bank industry in Shanghai is of oligopolistic market structure with a medium industrial concentration which has been decreasing during year2004-2010.The overall efficiency and scale efficiency of the big four State-owned commercial banks are generally higher than that of other joint-stock commercial banks, while their technical efficiency values are roughly at the same level. Based on the classical Berger regression model, this paper estimates the correlation of Shanghai banking market structure, efficiency and performance. We find out that there is no statistical significance between market structure and performance. Moreover, the regression analysis points out that there is positive statistical correlation between efficiency and performance and between scale efficiency and market share. Therefore, the results support the ESH and indicate that the MPH is not applicable for Shanghai banking. The conclusion is different from the researches based on the national level. The main reason is as follows. Since the concentration ratio of Shanghai banking market is much lower than that of the whole Chinese banking market, the competition among banks in Shanghai is very intense. Under the strong pressure from competition, the big four State-owned commercial banks (and other banks in Shanghai) have been devoted themselves on improving the operating efficiency which leads to the big four banks’high scale efficiency and the other banks’ high technical efficiency in Shanghai. Efficiency proves to be a key factor in banking performance and market structure.Finally, combined with Chinese realistic conditions, this paper provides two policy recommendations for the future development of banking sector. First, it is important to promote Interest Rate Liberalization, which could improve the financial product differentiation and then the competition in the commercial banking industry. Secondly, liberalizing market access restrictions could also enhance competition among banks. The regulatory authority should support and encourage the development of foreign invested banks and private-owned commercial banks, and should also reduce excessive administrative intervention and regulatory policies. |
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