Banking Industry Liberalization, Franchise Values and Deposits Mobilization: Evidence From International Panel Data

Banking industry liberalization in China has gained pace. The theoretical underpinning of this policy approach is the McKinnon-Shaw hypothesis, which contends that a liberalized financial sector will maximize the quantity of deposits mobilized and optimize the efficiency with which these funds are allocated amongst competing investments. However, disparate country experiences with the process of financial liberalization have prompted the emergence of alternative theoretical paradigms. One theory that has been proposed argues that through reducing bank franchise values, liberalization may have the effect of reducing the quantity of deposits mobilized. Drawing on an extensive international panel data set, the empirical analysis conducted in this paper suggests that, contrary to this hypothesis, bank franchise values are either unrelated, or negatively related, to deposits mobilization. Nevertheless, the process of banking industry liberalization still poses immense challenges for policy-makers in China, and the extent to which these challenges are adequately met will go a long way to determining whether the transition to a market economy is successfully completed.