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Bank competition, cost of credit and economic activity: evidence from Brazil

Author

Listed:
  • Gustavo Joaquim
  • Bernardus Doornik
  • GJosé Renato Haas Ornelas

Abstract

We use heterogeneous exposure to large bank mergers to estimate the effect of bank competition on both financial and real variables in local Brazilian markets. Using detailed administrative data on loans and firms, we employ a difference-in- differences empirical strategy to identify the causal effect of bank competition. Following M&A episodes, spreads increase and there is persistently less lending in exposed markets. We also find that bank competition has real effects: a 1% increase in spreads leads to a 0.2% decline in employment. We develop a tractable model of heterogeneous firms and concentration in the banking sector. In our model, the semi-elasticity of credit to lending rates is a sufficient statistic for the effect of concentration on credit and output. We estimate this elasticity and show that the observed effects in the data and predicted by the model are consistent. Among other counterfactuals, we show that if the Brazilian lending spread were to fall to the world level, output would increase by approximately 5%.

Suggested Citation

  • Gustavo Joaquim & Bernardus Doornik & GJosé Renato Haas Ornelas, 2023. "Bank competition, cost of credit and economic activity: evidence from Brazil," BIS Working Papers 1134, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1134
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    More about this item

    Keywords

    bank competition; mergers and acquisitions; lending; spreads; output;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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