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  5. Financial Intermediation: Bank Competition and Risk
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Financial Intermediation: Bank Competition and Risk

Paper Session

Saturday, Jan. 7, 2023 8:00 AM - 10:00 AM (CST)

Sheraton New Orleans, Rhythms I
Hosted By: American Finance Association
  • Chair: Olivier Darmouni, Columbia University

Bank Loan Markups and Adverse Selection

Mehdi Beyhaghi
,
Federal Reserve Bank of Richmond
Cesare Fracassi
,
University of Texas-Austin
Gregory Weitzner
,
McGill University

Abstract

We analyze market power in local US corporate loan markets by creating a measure of markup that incorporates banks' internal risk assessments. In contrast to typical theories of competition, markups are higher in regions in which more banks operate. We provide evidence that banks' market power is driven by asymmetric information across banks, which becomes exacerbated as the number of banks increases. Furthermore, markups drop following a shock that reduces asymmetric information in local loan markets. Our findings suggest that adverse selection is an important driver of market power in local bank markets and have implications for antitrust policy.

Fintech Disruption, Banks, and Credit (Dis-)Intermediation: When Do Foes Become Friends?

Yasser Boualam
,
University of North Carolina-Chapel Hill
Paul Yoo
,
University of North Carolina-Chapel Hill

Abstract

We build a financial intermediation model wherein bank and fintech intermediaries differ in their enforcement technology, reliance on collateral, and funding cost and compete or partner within frictional credit markets. The model explains the emergence and coexistence of three forms of lending associated with: (i) standalone banks, (ii) standalone fintechs, and (iii) bank-fintech partnerships. Fintech disruption enhances market competition and facilitates credit intermediation to previously underserved borrowers, but crowds out bank-captive borrowers as banks experience low profitability and get displaced. In equilibrium, fintech entry and the prevalence of partnerships do not necessarily benefit all borrowers, leading to ambiguous aggregate credit and welfare effects.

Bank Funding Risk, Reference Rates, and Credit Supply

Harry Cooperman
,
Federal Reserve Bank of New York
Darrell Duffie
,
Stanford University
Stephan Luck
,
Federal Reserve Bank of New York
Zachry Wang
,
Stanford University
Yilin (David) Yang
,
City University of Hong Kong

Abstract

Corporate credit lines are drawn more heavily when funding markets are more
stressed. This covariance elevates expected bank funding costs. We show that
credit supply is inefficiently dampened by the associated debt-overhang cost to bank
shareholders. Until 2022, this impact was reduced by linking the interest paid on
lines to credit-sensitive reference rates such as LIBOR. We show that transition to
risk-free reference rates may exacerbate this friction. The adverse impact on credit
supply is offset if the majority of drawdowns are expected to be left on deposit at the
same bank, which happened at some of the largest banks during the COVID shock.

Discussant(s)
Yufeng Wu
,
University of Illinois-Urbana-Champaign
Yao Zeng
,
University of Pennsylvania
Daniel Greenwald
,
Massachusetts Institute of Technology
JEL Classifications
  • G2 - Financial Institutions and Services