How Did China’s WTO Entry Affect the Local Banking System in the U.S.?

Abstract

We analyze how the product market competition shock due to China’s WTO entry affects local US banks heterogeneously. Using a difference-in-differences empirical strategy, we document that in regions with greater exposure to the shock, loan quality deteriorates and bank profitability declines more severely, coupled with slower loan growth and higher loan interest rates after the shock. Further, small banks lose market share and banking market concentration increases more in these regions.

Keywords: China’s WTO entry; Product market competition; Bank performance; Bank market structure; Loan growth and pricing; US banks

JEL Classification: F1, F13, F16, G21, L1, L2