How Do Banks Compete? Lessons From an Ecuadorian Loan Tax

We study how bank competition affects commercial lending using a quantitative model.

Who

Rebecca DeSimone (London Business School)

Where

IWH, conference room, Leipziger Straße 100 and via Zoom

Personal details

Rebecca DeSimone is an Assistant Professor with the Finance Subject Area at the London Business School. She is an applied microeconomist and her research focuses on corporate finance and its interactions with government regulation and taxes.

We study how bank competition affects commercial lending using a quantitative model. The model generalizes previous characterizations of bank competition by allowing banks a wide variety of competitive behavior - from setting prices as joint profit maximizers to pricing competitively under Bertrand-Nash competition, where demand-side frictions (e.g., default risk) and preferences determine markups. While recent literature suggests markups under Bertrand-Nash can incentivize banks to address frictions (e.g., monitor), pricing power from joint maximization is unambiguously harmful. We use passthrough estimates from the surprise introduction of a loan transaction tax in Ecuador, and data on the universe of commercial credit, to identify the model and test for modes of competition. We reject pure Bertrand-Nash competition but fail to reject joint maximization. Counterfactual analyses show 26% of observed markups are due to joint profit maximization and that moving to Bertrand-Nash would reduce equilibrium prices by 17%, increase loan use by 21% (intensive margin), and increase overall credit demand by 13% (extensive margin).

To join the lecture via ZOOM, please contact Melina Ludolph.