Credit Market Competition Research Articles

Elusive competition: impact of non-bank credit providers’ financing on credit market competition

Elusive competition: impact of non-bank credit providers’ financing on credit market competition

Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches

Abstract We present a model of credit market competition to derive key hypotheses about how information sharing between banks influences the spatial clustering of their branches. We then test these hypotheses using data on 56,555 branches owned by 614 banks across 19 countries. We find that information sharing incentivizes banks to establish branches in localities that are new to them but that are already served by other banks. The resultant branch clustering is associated with reduced spatial credit rationing, as information sharing enables firms to access credit from more distant banks. These findings underscore how information sharing makes it more important for banks to move closer to each other rather than closer to their borrowers.

Information Span and Credit Market Competition

Information Span and Credit Market Competition

Do election cycles, political stability, and government effectiveness matter for the risk of banks? Evidence from Indian banks

We examine whether parliamentary elections, political stability, and government effectiveness affect banks’ risk in one of the largest democracies – India. We employ four measures of bank risk – net and gross Non-Performing Loans (NPL), the extent of loans restructured, and lending to the priority sector. Using dynamic panel data with a two-step system GMM approach, we find that NPL and lending to the priority sector increase during the years parliamentary elections are held. A stable political environment reduces net NPL, while an effective government increases NPL and lending to the priority sector. Further, we document meaningful differences in the behavior of state-owned and private banks around parliamentary elections. Credit market competition and moral hazard channels drive the relationship between bank risk and elections.

Fintech Lending and Credit Market Competition

AbstractThis article studies how the rise of financial technology (Fintech) lending affects credit access, interest rates, and social welfare. We consider a lending competition model with two incumbent banks and a Fintech lender, which use different information and technologies to assess borrower creditworthiness. We show that Fintech lending could negatively affect high-quality borrowers’ access to credit when the Fintech lender’s screening accuracy is superior to that of the banks. Furthermore, Fintech lending may worsen the allocative efficiency of credit and reduce social welfare under some conditions. Analytical and numerical results suggest that Fintech lending mostly reduces the expected interest rates.

Integrating point-of-sale financing into the coordination of a price and credit dependent e-commerce supply chain

This paper investigates the decision-making and coordination of an e-commerce supply chain (ECSC) consisting of manufacturers – e-commerce (EC) platform-consumers. Demand is assumed price and credit-dependent. The credit is granted to the consumers by using a point-of-sale (POS) financing service provided by a third-party company. To integrate the credit into the ECSC, we constructed two decentralized decision-making models of Platform-POS credit and Manufacturer-POS credit, and a centralized decision-making model. In the basic scenario, that is with one manufacturer and when the POS company is in a competitive credit market, we can then explicitly solve the optimal decisions (the credit time, the platform's charge, and the product price), and for each model derive the optimal profits. Next, a comparative analysis of the equilibria across the different models is conducted. Analytical results show that the Manufacturer POS credit results in longer credit time and higher profits for both the manufacturer and the platform when compared with Platform-POS credit. Further, we propose a sharing agreement where the manufacturer and the platform share together the cost of the credit to coordinate the supply chain. In the extended scenario with multiple manufacturers, we found that the degree of competition among manufacturers critically moderates the selection of an optimal credit model for the manufacturers and platform. Moreover, numerical examples show that the results derived in the competition credit market still hold in a monopolistic credit market. Overall, our results shed light for the supply chain managers on how to select the most appropriate credit strategy.

Pricing strategies in BigTech lending: Evidence from China

AbstractThis paper analyzes a BigTech lender's pricing strategies in the business‐to‐customer unsecured loan market using a proprietary data set of consumer loans in China. We find that the credit rating constructed by the BigTech lender is informative of the customers' default risk. Moreover, the interest rate decreases and the credit limit increases with the credit rating. Interestingly, the BigTech lender charges different interest rates to its customers based on the customer channel, although it does not provide information about the customers' default risk. Following the passage of the China Banking Regulatory Commission Act, which reduced credit market competition, the BigTech lender increased the current rate and decreased the credit limit. We rationalize these empirical findings in a simple model of credit contract design.

Credit Market Competition and Moderation of Aggregate Fluctuations

Credit Market Competition and Moderation of Aggregate Fluctuations

Open banking: Credit market competition when borrowers own the data

Open banking facilitates data sharing consented to by customers who generate the data, with the regulatory goal of promoting competition between traditional banks and challenger fintech entrants. We study lending market competition when sharing banks’ customer transaction data enables better borrower screening for fintechs. Open banking promotes competition if it helps level the playing field for all lenders in screening borrowers; however, if it over-empowers fintechs, it can also hinder competition and leave all borrowers worse off. Due to the credit quality inference from borrowers’ sign-up decisions, this remains true even if borrowers have the control of whether to share their banking data. We also study extensions with fintech affinities and data sharing on borrower preferences.

A tale of two markets: Labor market mobility and bank information sharing

We develop a theory of bank information sharing, highlighting the interactions between credit and labor markets. A better-informed relationship bank competes with a less informed foreign bank for borrowers under asymmetric information about borrowers’ creditworthiness. Credit market competition triggers competition for the relationship bank’s loan officers, who possess valuable information about the borrowers’ creditworthiness. The relationship bank can share credit information to soften the labor market competition, despite intensifying the credit market competition. When labor market mobility is moderate, information sharing emerges as the optimal strategy of the relationship bank.

MICROFINANCE AND GENDER DISCRIMINATION IN CREDIT ALLOCATION: AN ECONOMIC ANALYSIS OF INCENTIVE CONTRACTS

In this paper, we develop a model of discrimination by effort between women and men in credit markets. The specificity of our model compared to the current literature consists in the level of effort effected by the agents who benefited of a microcredit is endogenous. We assume that borrowers have financial constraints and that they want to obtain funds to carry out their projects whose success depends on costly and unobservable efforts. Assuming that women exert a higher level of effort than men, we show that when information is perfect, all projects are financed and the collateral is completely eliminated. Women benefit of a lower interest rate than men and at the same time receives a loan of the same amount as men. In a situation of imperfect information, when the level of the project manager’s effort is private information, we show that in a competitive credit market where risks are not mixed, the riskier borrower obtains the same contract as in a perfect situation. When the state can guarantee highrisk borrowers (low efforts), their welfare improves. On the other hand, when government can provide guarantees for lowrisk borrowers (high efforts), it reduces collective welfare.

Competition, asset build up and export incentives: The role of imperfect credit market

This paper studies the export incentive of credit rationed, competitive and homogenous firms through asset build up highlighting the generic trade-off between competition and asset value in an imperfect credit market where poor and rich firms have different levels of assets. It is a contribution to the issues related to finance and trade in developing countries as raised first in Jones and Marjit (2001, AER). Our theoretical and empirical results indicate that although firms in more competitive industries are likely to be exporters, history of greater local competition before the entry of firms into export market i.e. under autarky, hurts export incentive by limiting cash flows and asset build up. In our set up more intense local competition hence lower price is an advantage to access global markets, but associated low profits and hence lower assets acts a detriment.

Fintech, Credit Market Competition, and Bank Asset Quality

Fintech, Credit Market Competition, and Bank Asset Quality

Concentration and competition in the Brazilian credit market

AbstractCompetition and concentration effects in the banking sector is still a highly object questioned in the public policy. Problems of asymmetric information and high interest rates prompt the discussion on whether bank competition is good or bad for efficiency, or more generally, for social welfare. In recent years, a lot of research work has been carried out investigating the nature of competition in the banking industry. Since the 2008 financial crisis, competition in the banking industry has been characterized with low interest rates, low credit growth, increased regulation and compliance requirements. The objective of this study is to analyze the national credit market by calculating and analyzing concentration and competition indicators, between 2010 and 2020. To compare and estimate indexes of concentration, such as the Herfindahl‐Hirschman index and competition through the Lerner index. The results suggest that the concentration has decreased in the period considered so as competitiveness, suggesting that there is less competition in the market. Despite the limitations pointed out, the results suggest that bank concentration in the Brazilian financial market has been decreasing over the last few years due to an increase position and importance of new players such as Digital Banks, Fintechs and High‐Techs firms, which caused a decrease in the market share of large banks. Although, competition levels are not improving, showing that the market share is being absorbed by Financial Institutions with a considerable size and perhaps not by new entrants in the market.

Banking Regulation and Collateral Screening in a Model of Information Asymmetry

This paper explores the impact of banking regulation on a competitive credit market with ex-ante asymmetric information and aggregate uncertainty. I construct a model where the government imposes a regulatory constraint that limits the losses banks make in the event of their default. I show that the addition of banking regulation results in three deviations from the standard theory. First, collateral is demanded of both high and low risk firms, even in the absence of asymmetric information. Second, if banking regulation is sufficiently strict, there may not exist an adverse selection problem. Third, a pooling Nash equilibrium can exist.

Liquidity shocks and interbank market failures: the role of deposit flights, non-performing loans, and competition

Banks may be reluctant to remove bad loans from their portfolios during liquidity shortfalls, giving rise to a moral hazard problem. In this paper, we analyze how liquidity shortages affect the ability of the interbank market to provide liquidity in a moral hazard setting. We distinguish two types of liquidity shocks that arise due to a deposit flight (a contraction in the deposit supply) or to a cash-flow shock (an increase in the non-performing loans). We show that the source of a liquidity shortfall is the main determinant of the decision of banks to stop lending in the interbank market, rather than the extra amount of funds that banks need to cover. An increase in the non-performing loans has more adverse effects on balance sheets than a deposit flight. We also demonstrate that competition has a dual effect on financial stability. Interbank competition enhances financial stability by reducing the liquidity provision cost, whereas credit market competition worsens financial stability by inducing banks to take riskier profiles.

The Real Effects of Bank Branching: Evidence from India

We study the impact of regulations expanding bank branching in India. We find that public sector banks (PSBs) reduce their lending to poorly performing firms when branching expands in a district. Non-performing loans at PSBs also increase when branching expands. Also, inefficient firms that depend on PSBs deleverage and are more likely to exit after branching expands in a district. At the plant level, exposure to branching is associated with an expansion in size and employment. These results suggest that greater credit market competition can lead to more efficient lending and increased economic activity in economies with protected credit markets.

Impact of Index Insurance on Moral Hazard in the Agricultural Credit Market: Theory and Evidence from Ghana

AbstractRecent research suggests that coupling microfinance loans with an index insurance policy may be a cost-effective way to expand credit market access to smallholder farmers in developing countries. Index insurance can increase demand for credit and encourage increased supply of credit by protecting borrowers and lenders from covariate production shocks that discourage credit market expansion. In this paper, we propose that index insurance, when bundled with credit, may also reduce a different barrier to credit market access: high transaction costs caused by moral hazard in the credit market. We develop a theoretical model of a competitive credit market with moral hazard. In this market, lenders use either dynamic incentives or collateral to mitigate the moral hazard problem. The model shows that index insurance bundled with loan contracts can reduce moral hazard and increase borrower welfare. We then test the model and find some empirical support using a subset of data from a randomised control trial in northern Ghana.

Fintech Entry and Credit Market Competition

This paper presents a spatial model to analyze the effects of the entry of Fintech lenders on credit market competition and welfare. In the model, banks compete with a Fintech lender for borrowers under asymmetric information. Both types of lenders can screen borrowers before making a loan, and their signals are conditionally independent and asymmetric. The Fintech lender will enter the market if its screening ability is sufficiently high or the credit market is not very competitive. Increased competition from Fintech entrants erodes banks' profitability. Contrary to the standard view, Fintech entry could hurt borrowers' access to credit and worsen allocative efficiency. Fintech entry crowds out banks in the long run and may reduce social welfare.

Free Banking and Credit Market Competition

Why do some countries (e.g. US/UK) have free banking and expensive overdrafts, while others (e.g. France/Germany) do not? Existing models point to naivety amongst consumers – but without evidence that such naivety differs across countries. This paper offers a different explanation. We model the two stages of competition between banks for accounts and then to supply credit. We allow for banks to compete to poach customers in the credit market. We show that free banking results when a country has greater numbers of high credit-risk borrowers. We predict that this leads to borrowers switching less yet paying higher prices for credit.