Integration of Commercial Banking between Taiwan and China after MOU

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Nov 8, 2013 (3 years and 8 months ago)

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1


Integration of
Commercial Bank
ing

between Taiwan and China

after MOU

Dr. Hong
-
Jen Abraham Lin

Department of Finance and

Business Management

Brooklyn College of the City University of New York

Abstract

This article
reviews the literature of efficiency
analysis of commercial banks in Taiwan and
China.

Furthermore, based on the experience of geographic deregulation in the European
continent and the US, the author depicts
a
picture of the integration

in future
.

From the perspectives cost and profit efficie
ncies derived by the existing em
pirical studies, the
author has

found
that
scale economy is not the motivation for Taiwanese and Chinese banks
to
expand.
N
o
evidence

impl
ies

that the acquisitions of banks help major banks in either Taiwan or
China improve
cost and profit efficiencies.
In the experience of China, t
he gain from improved
cost efficiency is mainly
caused by

minor foreign ownership and outside monitoring.

Furthermore, the banking markets in European Union and most of the states of the US are
mon
opolistic competitive after deregulations and integration.
Thus, t
he banking market
s

of
Taiwan and China
are expected to
be monopolistic competitive

after integration
.

Henceforth
, when
the banking industry is monopolistic competitive and
the equity market
is well
developed,
Q
uality of services or relationship
is

the key to success for the integration of the
banking industry across strait.




2


1.

Introduction

1.1
Background

China is
the one

of the fastest growing economies world
wide

and
the
first

choice
for

Taiwanese f
oreign
d
irect
i
nvestments
.
By

the end of 2008, Taiwan invested
$47.66 billion

in
China.

Major industries between Taiwan and China have integrated or become
horizontal
ly

and
vertical
ly

connected
. Nevertheless, no such

i
ntegration

exists

in the ba
nking industry because of
regulatory and political issues.

After
Taiwan and China joined
the
WTO

(World Trade Organization)
in 2001

and China
promised open banking and insurance markets in 2006
, m
ajor Western banks have
invested
shares in major Chinese
s
ta
te
-
o
wned
b
anks (
s
ee details in Hong et al. 2009, and Kuan, Yang, and
Huang, 2009)
. Taiwan
banks
may
also

grasp this opportunity to expand their business in China
,
whereas

China can demonstrate its economic power in Taiwan by establishing its banking
branch
es.

The promise of opening financial markets
was

fulfilled
in the
Memorandum of
Understanding

(
M
OU
) and
the
Economic Cooperation Framework Agreement

(
ECFA
) between
Taiwan and China.

The
MOU was signed
on
No
vember

16
,

2009
,

and
became valid o
n January
16, 2010.
The
MOU and ECFA further
integrate

financial markets between Taiwan and China.

W
ithin three to five years

after ECFA and MOU
, Taiwan and China will open their banking and
insurance markets to each
other

to
establish
cross
-
border
branche
s.

1.2
T
he Perspective of Banks from Taiwan

Banks in Taiwan have experienced

intense

competition
for more than a decade. From 1990
to 2001, the number of banks increased from 24 to 53
,

and
the return on equity

was

reduced
by a
margin of

29.28
%
to 5.5
%

(Lieu et al.,

2005)
.

Lin, Lin, and Mohanty (2009) stud
ied

24 Taiwan
publicly trade
d

banks and
found

high cost efficiency
to accompany

low profit efficiency

for the
whole industry.
H
o
mogeneous products
and
price
-
cut competitions
among banks

may cause the
re
asons behind this phenomenon
.
T
hese banks did not have strong markets outside
of
Taiwan
,

and m
ost
compete
primarily
in the Taiwan domestic market.

After open
ing

its door
s

to
banks in
other countr
ies
, w
i
ll China be an opportunity or

a

threat
to Taiwan bank
s?
Hong
and Zheng

(
2009
) compare
d

and show
ed

that
Taiwanese bank branches
in
M
ainland
China
profite
d more than their counterparts

in Taiwan

did
.

The opportunity for
b
anks

in Taiwan to

expand

to China

may increase in the future
.

Lu et al. (2005)
state
d

that
3


Chinese banks
a
re still in favor of lending loans to state
-
owned

enterprises.
Numerous

small
-

and
medium
-
sized

businesses in China cannot
obtain

sufficient

funding because of this biased policy
,

and

rely on funds from underground finance or family bo
rrowings for their capital investments
and working capital.
This could be the other market for
Taiwan

banks
in
China if Taiwan banks
cooperate with experienced local players.

B
anks
in China
will establish branches in Taiwan to serve more tourists and inves
tors from
China to Taiwan. Will China banks in Taiwan
become

a threat to Taiwan banks?
A
nswer
ing

this
question

requires a
discuss
ion

from China

s
perspective
.

1.3
T
he Perspective of Banks from China


Hsu (2008) compare
d

financial reforms in China and those

in Taiwan and conclude
d

that
the experience in Taiwan may help future banking development in China. Particularly after MOU
and ECFA, the foreseeable cooperation of financial institutions and communications across
the
Taiwan S
trait will become more
convenient and less costly. Financial institutions such as credit
unions

in China
may learn from Taiwan
on

reforms
in

local and underground finance. China may
not learn this type of knowledge and practical experience from major foreign bankers.

1.4
The
Structure of T
his
A
rticle


This
paper

review
s

literature
on commercial banking in China and Taiwan and analyze
s

strengths and weaknesses
using
two different approaches: 1) efficiency
analysis

and 2) strategic
analysis.
E
fficiency analysis includes cost eff
iciency, profit efficiency, scale economy
,

and scope
economy of the banking industry.
T
he analysis
is
based on industrial organization

tools
.
S
trategic
analysis incorporates the t
hreat or
opportunity for Taiwan banks
,

h
ow
they
can
face the “giant”
Big Four

in China
, and w
here the benefit

lies
for this
banking
cooperation or integration
.

According to the
above
research and analysis,
this work

draws conclusions,

address
es

possible

implications
, and indicates
directions
for

future studies.

The remainder of
this paper is organized as follows. Section 2 analyzes the existing
literature on scale economy, scope economy, efficiency, and productivity. Section 3 summarizes
the strategic approaches of relationship banking, e
-
banking, and consumer banking. Section 4
reviews the history and literature of geographic integration of the banking industry in the US and
Europe. Finally, Section 5 concludes the findings above.


2.

Efficiency Analysis

4


This section explores
the
strengths and weakness of banks in China and Taiwan f
rom
an

industrial organization

perspective
, mainly efficiency analysis. The concepts include scale
economy, scope economy, cost and profit efficiencies, and
information and communication
technology (ICT)

and productivity.

2.1 Scale Economy

The measure of s
cale economy
indicates

the existence of scale economy.
The indicator used
by
Jagtiani et al. (1995)

measures economy of scale.

If
a company operates at the level of

increasing return to scale, th
is indicator

is greater than one. If it
operates at the

const
ant return to
scale or decreasing return to scale, the Jagtiani

indicator

is equal to or smaller than one. The
existence of scale economy also means that as output increases, the average cost per unit of
output decrease
s
. That is, the more a bank produces,

the more it saves per unit

of output
.

Traditionally, the output variables of commercial banking
have
include
d

financial
investments, demand deposits (if demand deposit is not available, use total deposits), and total
loans, according to the intermediary
approach. Following this tradition and the method of
Jagtiani

et al. (1995)
,
Taiwan
b
anks fall in the ra
nge of
c
onstant
r
eturn to
s
cale (Huang, Chen,
and Chen, 2007; Huang , Chang, and Chiu,
2009
;

Lin, Lin, and Mohanty, 2009
;

and Fu and
Heffernan,
2007
)
.

Lieu et al. (2008)
found

that Taiwan banks are in the range of increasing return
to scale.
M
ost researchers and practitioners
observe

no scale economy (
that is,

constant return to
scale or decreasing return to scale) in the banking market in Taiwan. In ot
her words, enlarging
the size of a commercial bank
does
not lower the average cost.

2.2 Scope Economy

Willig (1979) estimate
d

the scope economy for multiproduct firms. This methodology
appropriately

applies
to

the field of banking. Scope economy means
that

the wider variety of
products a bank sells, the more it save
s

on

the average cost per product. For instance,
b
ank
h
olding
c
ompanies (or
u
niversal
b
anking in the U.K.) that include both commercial banking and
investment banking may enjoy
a

scope economy.
The concept of

bankas
s
urance


that
incorporates or merges both banking products and insurance products in
to

one financial
institution is
an
other example.

Based on the method of Willig (1979), the estimations by
Lin and Lin (2009) and Lin, Lin

and

Mohanty, (2009),
and
Yao et al. (2007) support the existence of scope economy.

F
u and
Heffernan (2008) indicat
e
d

that j
oint stock banks enjoy
a
higher
scope
economy
.
In practice,
5


Taiwan’s

second

financial reform moved toward the
b
ank
h
olding
c
ompany system

to increase
scope economy in banking.

2.3 Cost and Profit Efficiencies

T
his
sub
section

discuss
es

and summarize
s

the literature of cost and profit efficiencies in
banking based upon
Data Envelopment Analysis (
DEA
)

or the stochastic frontier approach.

Various
methodologies are not the focal point
; i
nstead, only the insights and implications from
the empirical literature are highlighted and compared.

Lin, Lin, and Mohanty (2009)

indicate
d

that

Taiwan
publicly traded
banks
were

more
cost
-
efficient

than
th
eir
Chinese counterparts before 2000.

Taiwan banks were featured with higher
transparency and better regulation than their Chinese counterparts. Kumbhakar
and Wang (2007)
found

that
joint
-
stock banks in China are more efficient and productive

than state
-
ow
ned ones
.

F
u and Heffernan (2007) indicate
d

that

j
oint stock banks

in China

enjoy higher cost
efficiency
.
Shen and Lu (2008)

also

posited that

joint stock and city commercial banks in China
are most profitable
; and following Wu, Chen and Lin (2007), the r
eturn on assets

for partial
foreign
-
owned banks is higher.

Yao, Jiang, and Feng (2007)

state
d

that
non
-
state banks were 8

to
18

% more efficient than state banks
.

Berger, Hasan
,

and Zhou (2008)
estimate
d

China bank

efficiencies

and found

that
the
Big
F
our are
the
least
profit
-
efficient
,

and f
oreign ownership
significantly
improves efficiency.

In
sum
mary
,
al
though
various

papers
have
explore
d

efficiencies from
diverse

angles, joint
-
stock banks are the most profitable or efficient among all
types of
banks.

Lieu et al. (2005) investigate
d

cost efficiency and off
-
balance sheet activities and found
that
old banks have better accessibility to off
-
balance sheet transactions and thus their cost efficiency
is higher. Liang et al. (2008) relate
d

non
-
performi
ng loans to operational efficiency of banks in
Taiwan. Lin, Lin
,

and Mohanty (2009) studied bank efficiencies from 1995 to 1999 and
estimated higher cost efficiencies for old banks. Their findings indicated that newly established
banks operated at

a

lower
efficiency level than old banks did. The main reason
why

old banks in
Taiwan operat
e

efficiently
is
market monitoring. That is, most government
-
owned banks are
partially publicly traded in the Taiwan Stock Exchange and become transparent to the market.
Hen
ce, they also mak
e

efforts toward
minimizing

cost (or
maximizing
profit) by following the
market mechanism.

2.4 Information
and Communication
Technology and Productivity

6


The constant return to scale
and the

existence of

scope economy in commercia
l banking
may be ascribed to

intensive

use of
i
nformation and
c
ommunication
t
echnology (ICT)
.

M
ore
than two decades
ago
, most bank information technology centered on the mainframe computer

system
.
In a bank, the most common IT structure includes m
any terminals linki
ng to a
mainframe computer

(
a
centralized computing system)
. A bank operating on this type of system
may not own
massive

extra capacity to manage more transactions
because

all transactions rel
y

on
the main frame.

O
ne personal computer can
currently
handle more transactions and difficult tasks
than

a

mainframe
of
twenty years ago. A bank operating on this

distributional computation


system
owns extra capacity to
handle

more products and transactions.
T
he
average

cost per product or
per unit of output

is
also
extremely

low. Therefore, t
he use of ICT and e
-
commerce models

has

shi
fted
and
re
shaped cost and
profit frontiers world
wide

(Lin and Lin, 2009)
.

Banks in Taiwan and China
have
also
transitioned to
ICT systems. After
decentralizing
the
ICT system a
nd
lowering
the cost per computer, the ICT cost of a small bank may not differ from
that of a big bank.
T
he ICT system
capacity
for a bank has grown
sufficiently

to handle multi
-
product businesses easily. The computing system
transition
explains why there
is no scale
economy and justifies the existence of scope economy in Taiwan and China.


2.5 Summary and Implications

T
he literature review

indicates that

most studies conclude that there is n
o
s
cale economy in
China and Taiwan
, but a scope economy
.

This implies
that
further development of multi
-
product
businesses such as
u
niversal
b
anking
,

b
ank
h
olding
c
ompanies
,

or

bankas
s
urance


will help
bank
s

acquire more scope economy.
Large
size will not automatically reduce the average cost of
bank
outputs.
The concept of

too
-
big
-
to
-
fail


is only a myth if a big bank does not own any
strength other than
its
size.

This coincides with the phenomena of the 1990’s economic downturn
in Japan and the 2008
-
2009 financial cris
e
s in the U
.
S.

Minor foreign ownership h
elps enhance
bank
efficiency in China
.
According to the features
of
Taiwan banks

such as
governance, management, market

monitoring, transparency,
and
comparatively solid regulation
,

Taiwan banks
are foreign

to China

in practice
.

It is expected that
Taiwan banks
that
enter
the
China market and acquire shares of China banks will improve cost
efficiency of banks in China

in future
.

Even though

Taiwan
has
gained higher efficiency
,
its
strength is

gradually
fading
after
7


increasingly
more Western and Japa
nese banks
have
entered the China market
.

L
ong
-
standing

political issues

have closed the door of cooperation between

Taiwan and China for decade
s
. This
has led to delay
ed involvement

of

Taiwan in China

s financial markets
following

Taiwan
’s

long
history
of

direct investment in China.


3.

Strategic Analyse
s

This session includes
various
strategic analyses including e
-
banking, relationship banking,
consumer banking and bank regulations.

3.1 E
-
Banking

China has
more

Internet
users
than any other country

world
wide
.
As of

2009, 384 million
persons

us
e

Internet
in China
,

including some urban and rural
labor workers.
A

large
web
population

implies h
uge e
-
banking

potential
.

Taiwan
development
using
Internet
technologies and applying e
-
commerce models
has
preceded
C
hina
, and is

t
hus
more advanced in e

banking.

The demand for loans is strong and the supply is short
in the loan market in China,
particularly in regions where very few financial institutions can effectively outreach enterprises.
In some rural areas, only
agricultural credit unions exist

and

operate following government
policies. Whenever the government tightens money supplies,

limited funding flow
s

to
urban

areas and fast growing rural or village enterprises suffer from insufficient funding. E
-
banking
brok
ers in China

try to match the asymmetric demand and supply of funds.

A
n
e
-
banking opportunity exists
for Taiwan banks
, which
works for village enterprises and
matches the demand and supply while banks in Taiwan have
a savings
surplus.

Dobson and Kashyap (
2006) state
d

that
the

financial system

in China

is still fragmented
where local branches have more decision making power compared with their counterparts
in

Western countries.
Conceptually, e
-
banking might help find new opportunities when current
markets are segmented.
E
-
banking
enables
borrowing across geographic or policy barriers

because of different interest rates, conditions, or loan policies

of different banks across borders
.

Berger and D
eYoung (2006) further explore
d

bank

efficiency

and
found

that
headquarter

control over remote branches increases over time
following

geographic integration. In the mean
time, the agency cost of banking branches decreases.
This phenomenon is
main
ly because

of

technological change.
T
he use of information and communication technolog
y

contributes
8


significantly

to lower agency cost
in

remote banking branches and better control ability from
bank headquarters (also see Lin and Lin
, 2009)
.

3.2

Relationship Banking

Rel
ationship banking is banking businesses based on specialized products and terms for each
related customer. Both borrowers and lenders can negotiate the terms
,
requirements
,

and interest
rates according to the unique needs

of customers
.

Boot and Thakor (20
00) and Boot (2000)

investigate
d

how European banks survived or even
thrived when American style transaction banking and capital markets prevail
ed

in the European
continent. W
hen
the
publicly traded bond or

equity market

develop
s
,

the amount of total loan
lending via commercial banking reduces
.

W
hen interbank competition is
simultaneously
more
serious, relationship banking adds higher value for borrowers.

The market share of relationship
banking increases among all loan lending.

Th
e situation stated by Boot and Thakor

is similar to that in
China:
the
equity market
has
been

booming and foreign and domestic banks
are increasing
.

Because
Taiwan’s entry to Chinese
financial markets has been delayed
,

Taiwan
banks
should focus on relation
-
oriented businesses
in

Taiwanese corporations in Mainland China.

Kuan et al. (2009) and Hong et al. (2009) stated

that

Taiwanese corporations and
entrepreneurs have preference to

financial services
in

Taiwan banks.
This is because
most
Taiwan corporations

in China are medium
-
small businesses that have difficulty
obtaining
funding from major banks

in China
.
However,
banks
in China
have difficulty

access and

assessing credit records of Taiwanese borrowers.
Taiwan
banks
should start businesses in China
with r
elationship banking among Taiwan firms.


F
ragmented marke
ts in China mentioned by
Dobson and Kashyap (2006)

offer opportunit
ies

for relationship banking
. The three geographic segments

of

the Yantze River Delta, the Pearl
River Delta, and the Beijing Capita
l region are not integrated in terms of decision making of
financial institutions.
A
discrepancy
exists
in interest rates and
loan
quality across different
segments.
The
research by
Berger, Hasan, and Zhou (2010) also implies that geographic or
product diversification does not improve the cost and profit
efficiencies

of
China
banks.
If
Taiwan banks can effectively integrate businesses across
various
segments and regions, the
chance of

success will increase.
This opens doors to small local financial institutions focus
ed

on
the
local market.
Hsu (2006)
suggested

that
T
aiwan banks in China
have
contributed to the
9


growth of Taiwan corporations in China
,

and will continue to foster further
growth of these
corporations
.
Leung et al. (2003)
indicated

that
Asia
banks have particular
strengths

in
entering

and surviving the China market. Hence, Taiwan banks might have higher
possibility
to

survive
and

thrive in China than some foreign banks, part
icularly in more localized, segmented, smaller
markets.

3.3

Consumer Banking

Consumer banking

in Taiwan

has grown rapidly
.
Taiwan banks experienc
ing

over expansion
and saturation in the domestic market
have sought

other new oversea
s

market
s
.
The
government
policies
of China
also encourage consumption, particularly in inner land provinces and rural
areas (
stimulus plans for rural areas
)
.

Therefore
, Taiwan banks may develop consumer
-
banking
business
es

in China.

However,
Hong et al. (2009)
did

not support
expansio
n of consumer
banking

business in China
because

Taiwan
has

suffered from bad debts
due to rapid

growth of
consumer banking such as credit card businesses.


3.4
Banking Reforms and Regulations

S
everal different view
points

includ
e

banki
ng reforms and capital adequacy.
Kwong and
Lee (2005) highlight
ed

a problem of current bank reforms in China. When required adequate
capital is higher, funding
from

Chinese banks will be tighter
,

so loanable fund
s

will flow to cities.
F
ast
-
growing village

and rural enterprises fac
e

the
problem

of
insufficient

working capital in
doing business.

Here
is an opportunity for Taiwan banks
, which

can cooperate with some local deposit and
loan institutions in towns, villages, or
in second and third

line cities wh
ere enterprises have
difficulty getting funds. Taiwan banks
can

use the channels of local
institutions

in China to
finance town and village enterprises,
when

major banks in China provide loans

that are
limited to
big state
-
owned or well
-
known companies.


R
isk and regulation issues are also concern
s

for

cross
-
border integration of the banking
industry between Taiwan and China. For China, investing in Taiwan (buying or establishing bank
branches in Taiwan) could help diversify its own risk geographically or e
ven politically

by

“putting
its

eggs in several baskets
.
” However,
this does not solve
monitoring and regulating
problems. In other words, “
Who
is watching
the
eggs in the basket?” (Amihud, DeLong, and
Saunders, 2003). Taiwan and China are still “rival
regimes
:
” China still claims its sovereignty
over Taiwan. This unfriendly political environment
could

heat up investor

anxiety

and cause
a
10


riskier

cross
-
strait integration than cases in Europe.

C
hina banks have long adopted

the
investment banking business
models

of Hong Kong
,
while in practice, commercial banking is more important in China (Hsu, 2006)
.

Hong Kong was
a British colony and its banking systems compl
y

with British regulation
s
. In short, it is
modernized and follows
a
market mechanism.
I
nvestment

banking is
also
more important than
commercial banking for big customers in Hong Kong.

Hsu suggest
ed that

China learn
from
the business models and experiences
of

Taiwan
, since
the banking system in Taiwan has

deal
t

with
underground finance
and the transit
ion from
underground finance

to organized commercial banking.
The

experience
in Taiwan
may help bank
reform

in China
, particularly in the transformation of local deposits and loan institutions.

4.

Historical Examples in
Integrated
Banking

Before 19
7
0,
c
ommercial
b
anking in the U
.
S
.

was

restricted to the state where
the
bank
headquarter
s were

located.
Several states
began

to de
-
regulate by removing geographic
restrictions on inter
-
state branching. Hence, the 1970s, 1980s
,

and 1990s
have
witnessed
upheava
l
in

the landscape of the commercial banking industry in the U
.
S
.

In 1994, the Riegel
-
Neal Interstate Banking and Branching Efficiency Act allowed out
-
of
-
state bank holding
companies to operate across state
s

without geographic restriction
s
. This long dereg
ulation
process
may help
to

understand banking industry
integration
between Taiwan and China.


Yildirim and Mohanty (2010)

describe
d

the market structure

of the commercial banking
industry for fifty states after deregulation. They
found

that in most state
s in the U
.
S
.
, the banking
industry operat
es

under monopolistic competition.
T
he commercial banking market has become
less competitive in recent years because large banks
have
gained more market power and small
banks
have become

less competitive. This conc
lusion supports Subsection 3.2,
that

quality
competition could be more essential than price competition.
T
he banking markets for both
Taiwan and China will
likely
stay monopolistic competitive after integration.

An
other well
-
known example
was

banking mar
ket integration in Europe in
the
1990

s.
European Market Unification (EMU) fostered

integration of the banking industry across
countr
ies

in Europe. Yildirim and Philippatos (2007) explore
d

the market structure and cost and
profit

efficiencies of banks in Europe from 1993 to 2000. They address
ed

the issue
that

a
competitive market
structure

leads to higher cost efficiency and causes lower profit efficiency.
Therefore, the removal of geographic restriction will not
automatically

enh
ance cost and profit
11


efficiencies
simultaneously
. These results from Europe coincide with those from Taiwan and
China
by

Lin, Lin and Mohanty (2009)
,

where cost efficiency increas
es

and
profit

decreas
es

after
banks integrate

more

within the boundary of eac
h economy.

Bandt and Davis (1999) state
d

that
country barriers
remain

significant after integration and integrated markets are monopolistic
competitive. Their conclusion is the same as the example of the U
.
S
.

explored by Yildirim and
Mohanty (2010).

Based
on the literature of integration of the banking industry in the U
.
S
.

and Europe,
this
work found

that the banking market
does

not automatically march toward the perfect competitive
market.
Instead,
a
monopolistic competitive market structure
is

common afte
r banking industry

integration
.

5
. Summary and Conclusions

This paper reviews and compares literature
on

commercial banking in Taiwan and China.
D
ifferences will continue to exist and the domestic bank will still own
certain

strengths and
market power.
This study

further compare
s

the different systems of Taiwan and China in terms of
efficiency analysis and strategic analysis

and discusses
the
integration
experience of the banking
industry in the U
.
S
.

and Europe.

From these analyses and literature review,

this work explores
how Taiwan banks survive and how China banks respond to
the

dramatic change in financial
integration across
the
Taiwan Strait

following MOU and ECFA
.

The
banking market
literature
shows
no scale economy

in both Taiwan and China.
Howeve
r
,
most literature supports the existence of scope economy.
Privately owned banks in
China

also
tend to be more cost and profit efficient than their state
-
owned counterparts.

N
o such evidence
exists
in Taiwan
because

most Taiwanese banks in the sample are

publicly traded and monitored
by investors.

Taiwan banks

enjoy higher cost efficiency, e
-
banking

strengths
, and r
elationship banking for
Taiwan corporations
. However,
because

the financial market in Taiwan is
so

small, the profit
efficiency of banks has b
een decreasing when the market is more competitive. The e
-
banking
potential
includes integrating fragmented Chinese markets and online loan agent
s, and
co
-
operations

after MOU and ECFA
. Taiwan banks
and

financial institutions
in China
may adopt
Taiwan
mode
ls
and develop
new consumer banking markets

in China. Taiwan
can

help fund
-

insufficient village enterprises to
obtain

loans, wh
ile

major large

banks
in China
focus on state
-
owned and
large

enterprises in first
-
tier cities
.
I
nstitutions
in China
may learn
institutional
12


knowledge in “underground finance
,
” “financial products
,

and

i
nsurance
.


Small credit unions

and

cooperative units
that
form
s
trategic alliance
s

or merger
s

with robust Taiwan banks

could

also
gain
quick
efficiency.

The history of banking in
tegration in the US
and E
u
rope
implies that banking markets in
most states are

comparatively

monopolistic.
Q
uality competition is very essential in a
monopolistic comparative market
;

therefore,
the commercial banking industry should compete
by providing hi
gher quality services and
differentiated fees
. European bankers have built

“relationship banking” to compete in financial markets against big international commercial
banks and
growing capital

markets.
B
ank

integration

does

not remove all legal or geograph
ic
barriers among nations or states. Instead, local banks still own specific strengths in local markets.

In
sum, banking industry
integration
will lead to

a

monopolistic competitive market
structure where quality competition, instead of price competition,

is the key to success. The
concepts of relationship banking in local markets, e
-
banking, and scope economy may contribute
to higher bank

efficiency

after integration.
Based on p
revious experiences and studies
, this work

conclude
s that

1) Taiwan banks own
strengths in the local market; 2) Taiwan banks will not
acquire
a
big market share in China, and 3)

Because

Taiwan has developed and reformed its
commercial bank
ing

market earlier than China, China may learn from Taiwan
about

financial
reforms.
Taiwan banks in China will definitely help
the continuous growth of
Taiwan
corporations

in China.



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