Interbank Competition with Costly Screening
AbstractWe analyze credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker's (1990) analysis, where he demonstrates that no pure strategy equilibrium exists when banks have zero screening costs. In our set up we show that interest rate on loans are largely independent of marginal costs, a feature consistent with the extant empirical evidence. In equilibrium, banks make positive profits in our model in spite of the threat of entry by inactive banks. Moreover, an increase in the number of active banks increases credit risk and so does not improve credit market efficiency: this point has important regulatory implications. Finally, we extend our analysis to the case where banks have differing screening abilities.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by De Gruyter in its journal The B.E. Journal of Theoretical Economics.
Volume (Year): 7 (2007)
Issue (Month): 1 (May)
Contact details of provider:
Web page: http://www.degruyter.com
Other versions of this item:
- Xavier Freixas & Sjaak Hurkens & Alan D. Morrison & Nir Vulkan, 2005. "Interbank Competition with Costly Screening," OFRC Working Papers Series 2005fe02, Oxford Financial Research Centre.
- Xavier Freixas & Sjaak Hurkens & Alan D. Morrison & Nir Vulkan, 2004. "Interbank comptetition with costly screening," Economics Working Papers 802, Department of Economics and Business, Universitat Pompeu Fabra.
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Winand Emons, 1997.
"Imperfect Tests and Natural Insurance Monopolies,"
dp9704, Universitaet Bern, Departement Volkswirtschaft.
- Ritzberger, Klaus & Weibull, Jörgen W., 1993.
"Evolutionary Selection in Normal Form Games,"
Working Paper Series
383, Research Institute of Industrial Economics.
- Mitchell A. Petersen & Raghuram G. Rajan, 1994.
"The Effect of Credit Market Competition on Lending Relationships,"
NBER Working Papers
4921, National Bureau of Economic Research, Inc.
- Petersen, Mitchell A & Rajan, Raghuram G, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, MIT Press, vol. 110(2), pages 407-43, May.
- Chiappori, P.A. & Perez-Castrillo, D. & Verdier, T., 1992.
"Spatial Competition in the Banking System: Localization, Cross Subsidies and the Regulation of Deposit Rates,"
DELTA Working Papers
92-15, DELTA (Ecole normale supérieure).
- Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995. "Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates," European Economic Review, Elsevier, vol. 39(5), pages 889-918, May.
- Javier Suárez, 1998. "Risk-taking and the prudential regulation of banks," Investigaciones Economicas, Fundación SEPI, vol. 22(3), pages 307-336, September.
- Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
- Holmstrom, Bengt & Tirole, Jean, 1993. "Market Liquidity and Performance Monitoring," Journal of Political Economy, University of Chicago Press, vol. 101(4), pages 678-709, August.
- Loretta J. Mester, 1993.
"Why are credit card rates sticky?,"
93-16, Federal Reserve Bank of Philadelphia.
- Matutes, Carmen & Vives, Xavier, 1995.
"Imperfect Competition, Risk Taking, and Regulation in Banking,"
CEPR Discussion Papers
1177, C.E.P.R. Discussion Papers.
- Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Shaffer, Sherrill, 1998.
"The Winner's Curse in Banking,"
Journal of Financial Intermediation,
Elsevier, vol. 7(4), pages 359-392, October.
- Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, vol. 58(2), pages 429-52, March.
- Basu, K. & Weibull, J., 1990.
"Strategy Subsets Closed Under Rational Behavior,"
62, Princeton, Woodrow Wilson School - Discussion Paper.
- Alan D. Morrison & Lucy White, 2004. "Financial Liberalisation and Capital Regulation in Open Economies," OFRC Working Papers Series 2004fe10, Oxford Financial Research Centre.
- Steven A. Sharpe, 1989.
"Asymmetric information, bank lending, and implicit contracts: a stylized model of customer relationships,"
Finance and Economics Discussion Series
70, Board of Governors of the Federal Reserve System (U.S.).
- Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-87, September.
- Hurkens Sjaak, 1995. "Learning by Forgetful Players," Games and Economic Behavior, Elsevier, vol. 11(2), pages 304-329, November.
- Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
- Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
- Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
- Arnoud W.A. Boot & Matej Marinc, 2006.
"Competition and Entry in Banking: Implications for Stability and Capital Regulation,"
Tinbergen Institute Discussion Papers
06-015/2, Tinbergen Institute.
- Boot, Arnoud W A & Marinc, Matej, 2006. "Competition and Entry in Banking: Implications for Stability and Capital Regulation," CEPR Discussion Papers 5518, C.E.P.R. Discussion Papers.
- CARLETTI, Elena & LEONELLO, Agnese, 2012. "Credit Market Competition and Liquidity Crises," Economics Working Papers ECO2012/14, European University Institute.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Peter Golla).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.