Information and Competition in Banking
Friday, Jan. 4, 2019 2:30 PM - 4:30 PM
- Chair: David Thesmar, Massachusetts Institute of Technology
Leverage Regulation and Market Structure: A Structural Model of the UK Mortgage Market
AbstractI develop a structural model of mortgage demand and lender competition to study how leverage regulation affects the equilibrium in the UK mortgage market. Using within-lender variation in risk-weighted capital requirements across mortgages with differential loan-to-values, I show that a one-percentage-point increase in risk-weighted capital requirements increases the average interest rate by 10 percent (28 basis points). I use the estimated model to study proposed leverage regulations. Counterfactual analyses show that large lenders exploit a regulatory cost advantage, which increases concentration of mortgage originations by 20-30 percent, and suggest that banning high loan-to-value mortgages may reduce large lenders' equity buffer.
Bank Transparency and Deposit Flows
AbstractBased on a large sample of U.S. banks from 1994-2013, we find a significantly positive relation between bank transparency and the sensitivity of uninsured deposit flows to bank performance. In addition, more transparent banks rely much more strongly on their equity to finance illiquid assets. These findings demonstrate both the costs and benefits of bank transparency. It makes deposits, which are banks’ main funding sources, more sensitive to bank performance and therefore can act as a discipline on banks’ risk taking behavior, but it also reduces banks’ unique role in liquidity transformation and the creation of safe money-like claims.
How Does Competition Affect Bank Lending? Quasi-Experimental Evidence from Bank Mergers
AbstractThis paper studies the effects of bank competition on commercial lending. I find that greater competition causes a change in the quantity and composition of businesses receiving loans, with more loans going to larger and safer borrowers. To identify exogenous changes in bank competition, I exploit discontinuities in the application of bank antitrust rules governing mergers. In markets that fall narrowly below regulatory cutoffs, competition declines due to bank mergers. In markets above cutoffs, forced branch divestitures keep competition constant even though mergers occur. Using a difference-in-differences methodology comparing these types of markets, I estimate that antitrust rules cause the Herfindahl Index to fall in relative terms by 180 points and, consistent with greater competition, deposit rates to rise by 0.13 percentage points. Using loan-level data from commercial mortgages, I show that this change in competition is associated with a 5 percent increase in the likelihood that borrowers take a loan from a local bank and an increase in the average borrower size of 10 percent without a change in the average loan-to-value ratio. For banks not directly involved in a merger, lending to large borrowers increases and the nonperforming loan ratio falls by 0.38 percentage points. Overall, my findings support a model in which competition improves the efficiency and quality of bank lending.
- G2 - Financial Institutions and Services