Credit portability and spreads: Evidence in the Brazilian market

Abstract

Credit portability is frequently advocated as a mechanism to foster competition in the banking industry, to lower spreads and to contribute to the development of financial intermediation. Yet there were no empirical studies that measured the effect of this policy on spreads. This article evaluates the effect of the portability resolution in the Brazilian credit market that was intended to facilitate borrowers to change from one financial institution to another whenever they have access to better credit conditions. By lowering switching costs, the portability resolution promotes competition among incumbent banks and consequently reduces credit spreads. Using difference-in-differences with matching estimation for 231 Brazilian financial institutions, we find that credit spreads for types of credit susceptible to portability become significantly lower than credit spreads for other types of credit that were not benefited by the new law.