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Asymmetric information and capital regulation in SME lending: a structural model of bank and non-bank competition

Author

Listed:
  • Negar Mohammadi Jazi

    (London School of Economics)

  • Felipe Netto

    (Bank of England)

Abstract

We analyse how risk-based capital requirements shape competition and credit allocation in the UK unsecured Small and Medium-sized Enterprises (SME) lending market using confidential loan-level data. Motivated by empirical patterns, we develop and estimate a structural model with screening, asymmetric information, and imperfect competition, in which banks and non-bank lenders differ in regulatory treatment. We estimate lender-specific costs and screening precision, and show how these features jointly account for the observed lender market shares across borrower risk and loan size segments. Our results indicate that regulation interacts with heterogeneity in information processing and costs to shape equilibrium pricing and credit allocation, with non-bank lending reflecting not only regulatory differences but also comparative advantages in screening technology. Our model provides a quantitative framework for evaluating regulatory policy in markets with both regulated and non-regulated intermediaries.

Suggested Citation

  • Negar Mohammadi Jazi & Felipe Netto, 2026. "Asymmetric information and capital regulation in SME lending: a structural model of bank and non-bank competition," Bank of England Staff Working Paper series 1191, Bank of England.
    • Handle: RePEc:boe:boeewp:023313
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/asymmetric-information-and-capital-regulation-in-sme-lending.pdf
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    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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