Market Power in Lending Markets
Paper Session
Friday, Jan. 7, 2022 3:45 PM - 5:45 PM (EST)
- Chair: Toni Whited, University of Michigan
Market Power in Small Business Lending: A Two-Dimensional Bunching Approach
Abstract
Do government-funded guarantees and interest rate caps primarily benefit borrowers or lenders under imperfect competition? We study how bank concentration impacts the effectiveness of these policy interventions in the small business loan market. Using data from the Small Business Administration’s (SBA) Express Loan Program, we estimate a tractable model of bank competition with endogenous interest rates, loan size, and take-up. We introduce a novel methodology that exploits loan “bunching” in the two-dimensional contract space of loan size and interest rates, utilizing a discontinuity in the SBA’s interest rate cap. In concentrated markets, we find that a modest decrease in the cap would increase borrower surplus by up to 1.5%, despite the rationing of some loans. In concentrated markets with a 50% loan guarantee, each government dollar spent raises borrower surplus by $0.64, boosts lender surplus by $0.34, and generates $0.02 of deadweight loss.The Impact of Alternative Forms of Bank Consolidation on Credit Supply and Financial Stability
Abstract
Between 2009 and 2011, the Spanish banking system underwent a restructuring process based on consolidation of savings banks. The program’s design allows us to study how alternative forms of consolidation affect credit supply and financial stability. We show that banks consolidating via mergers or business groups are ex-ante comparable in terms of local market’s overlap, financial and economic characteristics. We find that, relative to business groups, the market power of merged banks produces a contraction in credit supply, higher interest rates, but also a reduction in non-performing loans. To determine the welfare effects of consolidation, we estimate a structural model of credit demand and supply. In our framework, banks compete on interest rates and can ration borrowers. We also allow borrower surplus to depend on banks’ survival. Through counterfactuals, we quantify cost efficiencies and improvements in financial stability that consolidation should deliver to outweigh welfare losses from reduced credit supply.Mortgage Pricing and Monetary Policy
Abstract
Using the universe of U.K. mortgages originated during 2010-2014, we provide novel evidence on lenders' mortgage pricing and how central bank operations may have affected it. Specifically, we show that lenders seek to segment the market by offering two-part tariffs composed of interest rates and origination fees, and that this two-part pricing has become more prevalent during recent periods of unconventional monetary policy, such as U.K.'s Funding for Lending Scheme. To understand the effects of lenders' pricing strategies on market equilibrium, we develop and estimate a structural model of mortgage choice and lender competition in which borrowers may have different elasticities to rates and fees. We use the estimated model to decompose the effect of unconventional monetary policy on mortgage pricing, as well as to compute the contribution of two-part pricing to lenders' profits and borrowers' surplus. We find that central bank operations increased borrower surplus and aggregate welfare, whereas banning price discrimination through two-part pricing would lower aggregate welfare.Discussant(s)
Yufeng Wu
,
University of Illinois-Urbana-Champaign
Anthony Lee Zhang
,
University of Chicago
Mark Egan
,
Harvard Business School
Marco Di Maggio
,
Harvard Business School and NBER
JEL Classifications
- E4 - Money and Interest Rates
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit