Advanced Search
MyIDEAS: Login

Can Competition in the Credit Market be Excessive?

Contents:

Author Info

  • Caminal, Ramón
  • Matutes, Carmen

Abstract

We study the welfare implications of market power in a model where banks choose between credit rationing and monitoring in order to alleviate an underlying moral-hazard problem. We show that the effect of banks’ market power on social welfare is the result of two countervailing effects. On the one hand, higher market power increases lending rates, worsens the borrower’s incentive problem and investment is further reduced below the efficient level. On the other hand, higher market power induces banks to exert higher monitoring effort and reduces the frequency of credit rationing. Whenever the second effect dominates, it is socially optimal to provide banks with some degree of market power.

Download Info

If 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.
File URL: http://www.cepr.org/pubs/dps/DP1725.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

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 Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1725.

as in new window
Length:
Date of creation: Oct 1997
Date of revision:
Handle: RePEc:cpr:ceprdp:1725

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: Credit Rationing; market power; Monitoring; Moral Hazard;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Allen N. Berger & David B. Humphrey, 1994. "Bank scale economies, mergers, concentration, and efficiency: the U.S. experience," Finance and Economics Discussion Series 94-23, Board of Governors of the Federal Reserve System (U.S.).
  2. 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.
  3. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1990. "The Role of Banks in Reducing the Costs of Financial Distress in Japan," NBER Working Papers 3435, National Bureau of Economic Research, Inc.
  4. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  5. Allen N. Berger & Timothy H. Hannan, 1993. "Using efficiency measures to distinguish among alternative explanations of the structure-performance relationship in banking," Finance and Economics Discussion Series 93-18, Board of Governors of the Federal Reserve System (U.S.).
  6. Besanko, David & Kanatas, George, 1993. "Credit Market Equilibrium with Bank Monitoring and Moral Hazard," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 213-32.
  7. Bester,Helmut Hellwig,Martin, 1987. "Moral hazard and equilibrium credit rationing: An overview of the issues," Discussion Paper Serie A 125, University of Bonn, Germany.
  8. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
  9. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  10. Matutes, Carmen & Vives, Xavier, 2000. "Imperfect competition, risk taking, and regulation in banking," European Economic Review, Elsevier, vol. 44(1), pages 1-34, January.
  11. Thakor, Anjan V., 2000. "Relationship Banking," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 3-5, January.
  12. Bacchetta, Philippe & Caminal, Ramón, 1996. "Do Capital Market Imperfections Exacerbate Output Fluctuations?," CEPR Discussion Papers 1422, C.E.P.R. Discussion Papers.
  13. Vesa Kanniainen & Rune Stenbacka, 1997. "Project Monitoring and Banking Competition under Adverse Selection," CIG Working Papers FS IV 97-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Oct 1998.
  14. Michael H. Riordan, 1992. "Competition and Bank Performance: A Theoretical Perspective," Papers 0026, Boston University - Industry Studies Programme.
  15. David Besanko & Anjan V. Thakor, 2004. "Relationship Banking, Deposit Insurance and Bank Portfolio Choice," Finance 0411046, EconWPA.
  16. J. Miguel Villas-Boas & Udo Schmidt-Mohr, 1999. "Oligopoly with Asymmetric Information: Differentiation in Credit Markets," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 375-396, Autumn.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Chen, Xiaofen, 2007. "Banking deregulation and credit risk: Evidence from the EU," Journal of Financial Stability, Elsevier, vol. 2(4), pages 356-390, March.
  2. Mannonen, Pekka, 2001. "Advancing information technology and financial intermediation," Discussion Papers 770, The Research Institute of the Finnish Economy.
  3. Fiona, Tregenna, 2006. "An empirical investigation of the effects of concentration on profitability among US banks," MPRA Paper 13731, University Library of Munich, Germany, revised 2009.
  4. Mannonen, Pekka, 2002. "The Strategic Response of Banks to an Exogenous Positive Information Shock in the Credit Markets," Discussion Papers 830, The Research Institute of the Finnish Economy.
  5. Mitchell Berlin & Alexander Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia.
  6. Luz Adriana Flórez & Carlos Esteban Posada & José Fernando Escobar, 2004. "El Crédito Y Sus Factores Determinantes: El Caso Colombiano (1990-2004)," BORRADORES DE ECONOMIA 002482, BANCO DE LA REPÚBLICA.
  7. Luz Adriana Flórez & Carlos Esteban Posada & José Fernando Escobar, 2005. "Crédito Y Depósitos Bancariosen Colombia (1990-2004): Una Relación De Largo Plaz," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  8. Oz Shy & Rune Stenbacka, 2004. "Market Structure and Risk Taking in the Banking Industry," Journal of Economics, Springer, vol. 82(3), pages 249-280, 07.
  9. Corvoisier, Sandrine & Gropp, Reint, 2002. "Bank concentration and retail interest rates," Journal of Banking & Finance, Elsevier, vol. 26(11), pages 2155-2189, November.
  10. Elsas, Ralf, 2005. "Empirical determinants of relationship lending," Journal of Financial Intermediation, Elsevier, vol. 14(1), pages 32-57, January.
  11. Felix J. Lopez Iturriaga, 2005. "Debt ownership structure and legal system: an international analysis," Applied Economics, Taylor & Francis Journals, vol. 37(3), pages 355-365.
  12. Ramon Caminal, 2002. "Taxation of banks: A theoretical framework," UFAE and IAE Working Papers 525.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  13. Vesa Kanniainen & Rune Stenbacka, 1997. "Project Monitoring and Banking Competition under Adverse Selection," CIG Working Papers FS IV 97-23, Wissenschaftszentrum Berlin (WZB), Research Unit: Competition and Innovation (CIG), revised Oct 1998.
  14. Claudia M. Buch, 2000. "Capital Market Integration in Euroland: The Role of Banks," German Economic Review, Verein für Socialpolitik, vol. 1(4), pages 443-464, November.
  15. Utrero-Gonzalez, Natalia, 2007. "Banking regulation, institutional framework and capital structure: International evidence from industry data," The Quarterly Review of Economics and Finance, Elsevier, vol. 47(4), pages 481-506, September.
  16. Koskela, Erkki & Stenbacka, Rune, 2000. "Is there a tradeoff between bank competition and financial fragility?," Journal of Banking & Finance, Elsevier, vol. 24(12), pages 1853-1873, December.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:1725. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

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.