Reputation Barrier And Reputation Mechanism Design Of Private Banks’ Marginal Entry

Attempting to set up the Private Bank at their own risk by the private capital is one of the most important steps following the share-holding system reform of China’s banking industry, to realize the transition from stock reform to incremental reform, which makes great sense to the better development of the Socialist Market Economy. On the one hand, it broadens the channels of private capital into the banking industry, to adjust China’s banking industry structure, to accelerate the transformation and upgrading of the banking sector. Private Banks have many advantages over State-owned Commercial Banks:clear property rights, management of high efficiency, strong innovation ability, etc. The formation of private bank competitiveness can produce a "Demonstration Effect" motivating the State-owned Commercial Banks to optimize their capital structure and improve their business performance and innovation ability. On the other hand, Private Bank can improve the efficiency of financial resource allocation, meet financial market effective demands. As one of the most important force to promote China’s economic development, the SME (small and medium-sized private enterprises) is difficult to obtain the financial support from existing banking structure. Private Banks have the information advantages of pressing close to private enterprise, easy to overcome the transaction cost caused by information asymmetry, and financial service obstacles such as adverse selection, which makes great importance to solve the SME financing problem.The essence of market economy is credit economy; reputation is the expression of credit. Bank is in the center of market credit, establishing and maintaining a good reputation is the fundamental guarantee to be the credit intermediary role. At present, China’s banking industry presents five large-scale State-owned Commercial Banks oligopoly, several National Shareholding Banks co presence market structure. As the potential entrants, Private Banks enter the market by Marginal Entry of horizontal differentiation to avoid direct competition with advanced entrants, shooting for certain space for the survival and development of Private Bank. While the lack of government’s recessive guarantee, the moral hazard under asymmetric information, the rent-seeking risk of scarce resources, insider control risk in equity arrangement, the management risk under the scale disadvantage, institutional defects etc. All of these caused public concern about the credibility of Private Bank, which leads to the reputation barrier. Just like other forms of entry barriers, reputation barrier not only increases the cost and difficulty of market entry, but also affects the subsequent operation stability and security of the Private Banks.This paper based on the relevant theory of industry economics and reputation economics, defines the reputation barrier to Private Banks. According to the nature and sources of different factors, this paper divided them into external institutional guarantee factors and internal management pattern. External institutional guarantee factors mainly include:as lack of government’s recessive guarantee, the fragile and destroyed problems of reputation sands out easily. Interest rate marketization, deposit insurance system, financial bankruptcy system and other external supporting systems are not sufficient; Factors on internal management pattern mainly includes: ownership structure and management structure are imperfect, narrow market results in operation instability, as well as the profit pursuing nature of private capital lending irregularities, such as potential pitfalls, etc. The dominant factor of reputation barrier presents the law that external institutional guarantee factor transferring to the internal operation gradually.Based on reputation barrier dominant pattern analysis, design two steps reputation mechanism targeted to overcome reputation barrier of different period, this is also the research focal point in this paper. By constructing a dynamic game model of signal transmission, this paper analyzed the reputation building effect of Private Banks and proved that there exists a critical signal strength can distinguish between healthy and speculative private banks; Through multiple stages game model, analyzes the Private Banks reputation maintaining effect and reputation self-accumulating effect. In addition, in view of the homogeneity between the Private Bank of China and the Community Banks of the United States, combined with the successful experience of American Community Banks, provides certain reference value and significance to overcome the reputation barrier of China’s Private Bank...