Banks expanding to new markets is commonplace nowadays amid the financial deregulations and integrations. The expansion can reduce the operating costs of the banks due to the economy of scale and hence, the competitiveness of the banks is enhanced. However, when a bank enters a new market, it is not familiar with the new potential customers and so the information asymmetry between the lender and borrowers is presented. The article applies a static game theoretical model to discuss the banks’ entry decisions to a new market.
The potential entrant has a lower funding cost than the incumbent banks, but the incumbent banks are more informative regarding the customers. We separate the analysis into three parts and draw the following conclusions: first, when de novo entry is profitable, no incumbent banks are able to survive through the entry but some bad customers can receive loans from the entering bank. Second, when the de novo entry is profitable but merging an incumbent bank is the chosen entry method, the acquisition price is non-negative. If the acquisition price is zero, acquiring an incumbent bank is even more profitable than entering directly. Finally, if de novo entry is not profitable, acquisition price accepted by the targeted bank is strictly positive and an incumbent bank that has a larger proportion of high quality customers is offered a lower acquisition price.