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Debt Concentration and Bargaining Power: Large Banks, Small Banks, and Secondary Market Prices

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  • Fernandez, Raquel
  • Ozler, Sule

Abstract

Commercial bank debts of developing countries are held by large international banks and smaller domestic banks. This paper investigates how debt concentration--the proportion of a country's debt held by large banks relative to small banks--affects the secondary market price for these loans. We find that countries with higher concentrations have higher secondary-market prices. We explain this empirical finding in a bargaining model that endogenizes the maximum penalty that banks can credibly impose on a recalcitrant debtor. We show that the banks' bargaining power increases with the degree of debt concentration, thus increasing repayment and secondary-market prices. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Fernandez, Raquel & Ozler, Sule, 1999. "Debt Concentration and Bargaining Power: Large Banks, Small Banks, and Secondary Market Prices," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(2), pages 333-355, May.
    • Handle: RePEc:ier:iecrev:v:40:y:1999:i:2:p:333-55
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