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Determinants of bank versus nonbank competitiveness in short-term business lending

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  • Elizabeth S. Laderman

Abstract

Since about 1974, banks' share of the market for short-term business lending has been steadily eroded through competition with nonbank creditors. This paper tries to identify some factors that may affect bank competitiveness in this category in the short fun and discusses how these factors may have contributed to banks' loss of market share. Estimation of a simple linear model in first differences indicates that banks' market share responds negatively in the short run to above-average default risk and/or monetary tightness and to a decrease in banks' value of deposit insurance. Banks' market share responds positively to an increase in the level of interbank competition. Extrapolation from the short-run model to long-run effects demonstrates the plausibility that above average risk and/or monetary tightness and increases in the aggregate weighted capital-to-assets ratio, which contributes to decreases in the value of deposit insurance, may have played a small role in banks' loss of market share since the mid-1970s.

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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1993)
Issue (Month): ()
Pages: 17-32

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Handle: RePEc:fip:fedfer:y:1993:p:17-32:n:2

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Related research

Keywords: Bank loans ; Bank competition ; Commercial loans;

References

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  1. Elizabeth S. Laderman & Randall J. Pozdena, 1991. "Interstate banking and competition: evidence from the behavior of stock returns," Economic Review, Federal Reserve Bank of San Francisco, issue Spr, pages 32-47.
  2. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
  3. Robert N. McCauley & Rama Seth, 1992. "Foreign bank credit to U.S. corporations: the implications of offshore loans," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 52-65.
  4. John P. Judd, 1979. "Competition between the commercial paper market and commercial banks," Economic Review, Federal Reserve Bank of San Francisco, issue Win, pages 39-53.
  5. Evelyn M. Hurley, 1977. "The commercial paper market," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jun, pages 525-536.
  6. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  7. Black, Fischer, 1975. "Bank funds management in an efficient market," Journal of Financial Economics, Elsevier, vol. 2(4), pages 323-339, December.
  8. James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
  9. Benjamin M. Friedman & Kenneth Kuttner, 1993. "Why Does the Paper-Bill Spread Predict Real Economic Activity?," NBER Chapters, in: Business Cycles, Indicators and Forecasting, pages 213-254 National Bureau of Economic Research, Inc.
  10. Pennacchi, George G, 1987. "A Reexamination of the Over- (or Under-) Pricing of Deposit Insurance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(3), pages 340-60, August.
  11. Frederick T. Furlong, 1983. "New deposit instruments," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue May, pages 319-326.
  12. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  13. Herbert L. Baer & Christine A. Pavel, 1988. "Does regulation drive innovation?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Mar, pages 3-15.
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Citations

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Cited by:
  1. Mitchell Berlin & Loretta J. Mester, 1998. "Deposits and relationship lending," Working Papers 98-22, Federal Reserve Bank of Philadelphia.
  2. Elijah Brewer, III & Bernadette A. Minton & James T. Moser, 1996. "Interest-rate derivatives and bank lending," Working Paper Series, Macroeconomic Issues WP-96-13, Federal Reserve Bank of Chicago.
  3. Elijah Brewer, III & William E. Jackson, III & James T. Moser, 2001. "The value of using interest rate derivatives to manage risk of U.S. banking organizations," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 49-66.
  4. Mitchell Berlin & Loretta J. Mester, 1998. "Deposits and Relationship Lending Review of Financial Studies," Center for Financial Institutions Working Papers 99-03, Wharton School Center for Financial Institutions, University of Pennsylvania.

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