IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v52y2015icp189-198.html
   My bibliography  Save this article

Exclusion, competition, and regulation in the retail loan market

Author

Listed:
  • Melnik, Arie
  • Shy, Oz

Abstract

Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.

Suggested Citation

  • Melnik, Arie & Shy, Oz, 2015. "Exclusion, competition, and regulation in the retail loan market," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 189-198.
    • Handle: RePEc:eee:jbfina:v:52:y:2015:i:c:p:189-198
    DOI: 10.1016/j.jbankfin.2014.08.019
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426614002866
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2014.08.019?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Christopher R. Knittel & Victor Stango, 2003. "Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards," American Economic Review, American Economic Association, vol. 93(5), pages 1703-1729, December.
    2. Thorsten Beck & Asli Demirgüç-Kunt & Maria Soledad Martinez Peria, 2008. "Banking Services for Everyone? Barriers to Bank Access and Use around the World," The World Bank Economic Review, World Bank, vol. 22(3), pages 397-430, November.
    3. Hoff, Karla & Stiglitz, Joseph E., 1998. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 55(2), pages 485-518, April.
    4. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    5. Laffont, Jean-Jacques, 2003. "Collusion and group lending with adverse selection," Journal of Development Economics, Elsevier, vol. 70(2), pages 329-348, April.
    6. Calem, Paul S & Mester, Loretta J, 1995. "Consumer Behavior and the Stickiness of Credit-Card Interest Rates," American Economic Review, American Economic Association, vol. 85(5), pages 1327-1336, December.
    7. Beck, Thorsten & Demirguc-Kunt, Asli & Martinez Peria, Maria Soledad, 2007. "Reaching out: Access to and use of banking services across countries," Journal of Financial Economics, Elsevier, vol. 85(1), pages 234-266, July.
    8. Robert DeYoung & Ronnie J. Phillips, 2009. "Payday loan pricing," Research Working Paper RWP 09-07, Federal Reserve Bank of Kansas City.
    9. Avner Shaked & John Sutton, 1982. "Relaxing Price Competition Through Product Differentiation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(1), pages 3-13.
    10. Longhofer, Stanley D. & Santos, Joao A. C., 2000. "The Importance of Bank Seniority for Relationship Lending," Journal of Financial Intermediation, Elsevier, vol. 9(1), pages 57-89, January.
    11. Heuson, Andrea & Passmore, Wayne & Sparks, Roger, 2001. "Credit Scoring and Mortgage Securitization: Implications for Mortgage Rates and Credit Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 23(3), pages 337-363, November.
    12. Stephen A. Ross, 1989. "Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, American Finance Association, vol. 44(3), pages 541-556, July.
    13. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    14. Melnik, Arie L. & Plaut, Steven E., 1998. "Credit quality, the intensity of regulation and the segmentation of debt markets," Research in Economics, Elsevier, vol. 52(4), pages 431-449, December.
    15. Stephen A. Ross, 1989. "Institutional Markets, Financial Marketing, and Financial Innovation," Journal of Finance, American Finance Association, vol. 44(3), pages 541-556, July.
    16. Asli Demirguc-Kunt & Edward J. Kane, 2002. "Deposit Insurance Around the Globe: Where Does It Work?," Journal of Economic Perspectives, American Economic Association, vol. 16(2), pages 175-195, Spring.
    17. Lazear, Edward P, 1986. "Retail Pricing and Clearance Sales," American Economic Review, American Economic Association, vol. 76(1), pages 14-32, March.
    18. Robert Hauswald & Robert Marquez, 2003. "Information Technology and Financial Services Competition," Review of Financial Studies, Society for Financial Studies, vol. 16(3), pages 921-948, July.
    19. James Devlin, 2005. "A Detailed Study of Financial Exclusion in the UK," Journal of Consumer Policy, Springer, vol. 28(1), pages 75-108, December.
    20. Laffont, Jean-Jacques & N'Guessan, Tchetche, 2000. "Group lending with adverse selection," European Economic Review, Elsevier, vol. 44(4-6), pages 773-784, May.
    21. Jain, Sanjay, 1999. "Symbiosis vs. crowding-out: the interaction of formal and informal credit markets in developing countries," Journal of Development Economics, Elsevier, vol. 59(2), pages 419-444, August.
    22. Wolf Wagner, 2010. "Loan Market Competition and Bank Risk-Taking," Journal of Financial Services Research, Springer;Western Finance Association, vol. 37(1), pages 71-81, February.
    23. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-381, July.
    24. Klaus Schaeck & Martin Cihak & Simon Wolfe, 2009. "Are Competitive Banking Systems More Stable?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 711-734, June.
    25. Sironi, Andrea, 2002. "Strengthening banks' market discipline and leveling the playing field: Are the two compatible?," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1065-1091, May.
    26. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-744, Winter.
    27. Sandra E. Black & Donald P. Morgan, 1999. "Meet the new borrowers," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 5(Feb).
    28. Bell, Clive & Srinivasan, T N & Udry, Christopher, 1997. "Rationing, Spillover, and Interlinking in Credit Markets: The Case of Rural Punjab," Oxford Economic Papers, Oxford University Press, vol. 49(4), pages 557-585, October.
    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


    Cited by:

    1. Jain, Richa & Reindorp, Matthew & Chockalingam, Arun, 2023. "Buyer-backed purchase-order financing for SME supplier with uncertain yield," European Journal of Operational Research, Elsevier, vol. 307(2), pages 758-772.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Florian Leon, 2015. "What do we know about the role of bank competition in Africa?," CERDI Working papers halshs-01164864, HAL.
    2. Abhirupa Das & Uday Bhanu Sinha, 2022. "Microfinance institution and moneylenders in a segmented rural credit market," Working papers 324, Centre for Development Economics, Delhi School of Economics.
    3. Beck, Thorsten & De Jonghe, Olivier & Schepens, Glenn, 2013. "Bank competition and stability: Cross-country heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 22(2), pages 218-244.
    4. Bing Xu & Honglin Wang & Adrian Van Rixtel, 2015. "Do banks extract informational rents through collateral?," BIS Working Papers 522, Bank for International Settlements.
    5. Fungáčová, Zuzana & Shamshur, Anastasiya & Weill, Laurent, 2017. "Does bank competition reduce cost of credit? Cross-country evidence from Europe," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 104-120.
    6. Inderst, Roman & Mueller, Holger M., 2007. "A lender-based theory of collateral," Journal of Financial Economics, Elsevier, vol. 84(3), pages 826-859, June.
    7. Francesco Marchionne & Alberto Zazzaro, 2018. "Risk and competitiveness in the Italian banking sector," Economics Bulletin, AccessEcon, vol. 38(1), pages 271-280.
    8. Yaldız Hanedar, Elmas & Broccardo, Eleonora & Bazzana, Flavio, 2014. "Collateral requirements of SMEs: The evidence from less-developed countries," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 106-121.
    9. Bing Xu & Honglin Wang & Adrian Van Rixtel, 2015. "Do banks extract informational rents through collateral?," BIS Working Papers 522, Bank for International Settlements.
    10. Shijaku, Gerti, 2016. "Does bank competition affect bank stability after the global financial crisis?," MPRA Paper 79084, University Library of Munich, Germany.
    11. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2012. "How does bank competition affect systemic stability ?," Policy Research Working Paper Series 5981, The World Bank.
    12. Xu, Bing & Wang, Honglin & Rixtel, Adrian van, 2016. "Do banks extract informational rents through collateral?," BOFIT Discussion Papers 5/2016, Bank of Finland Institute for Emerging Economies (BOFIT).
    13. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does competition affect bank systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 1-26.
    14. Stijn Claessens, 2009. "Competition in the Financial Sector: Overview of Competition Policies," The World Bank Research Observer, World Bank, vol. 24(1), pages 83-118, April.
    15. BARRA, Cristian & ZOTTI, Roberto, 2017. "Bank Performance, Financial Stability and Market Competition: do Cooperative and Non-Cooperative Banks Behave Differently?," CELPE Discussion Papers 143, CELPE - CEnter for Labor and Political Economics, University of Salerno, Italy.
    16. Shijaku, Gerti, 2016. "Does concentration matter for bank stability - evidence from Albanian Banking System," MPRA Paper 79086, University Library of Munich, Germany.
    17. Beck, T.H.L. & De Jonghe, O.G. & Schepens, G., 2012. "Bank Competition and Stability : Cross-country Heterogeneity (Revised version of CentER DP 2011-080)," Discussion Paper 2012-085, Tilburg University, Center for Economic Research.
    18. Eric Tassel, 2022. "Relationship Lending and Liquidation Under Imperfect Information," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(1), pages 151-165, February.
    19. repec:zbw:bofitp:2016_005 is not listed on IDEAS
    20. Hsieh, Joyce & Chen, Ting-Cih & Lin, Shu-Chin, 2019. "Financial structure, bank competition and income inequality," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 450-466.
    21. Bijoy Rakshit & Samaresh Bardhan, 2020. "Does Bank Competition Enhance or Hinder Financial Stability? Evidence from Indian Banking," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(special i), pages 75-102.

    More about this item

    Keywords

    Credit quality; Interest rate regulation; Lending; Exclusion of borrowers;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:52:y:2015:i:c:p:189-198. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.