Antitrust & Competition Policy Blog

Editor: D. Daniel Sokol
University of Florida
Levin College of Law

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Thursday, February 14, 2013

Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending

Posted by D. Daniel Sokol

Stefan Arping (University of Amsterdam) has a paper on Banking Competition and Soft Budget Constraints: How Market Power can threaten Discipline in Lending.

ABSTRACT: In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships become "too cozy", interest rates rise, and loan performance deteriorates.

http://lawprofessors.typepad.com/antitrustprof_blog/2013/02/banking-competition-and-soft-budget-constraints-how-market-power-can-threaten-discipline-in-lending-.html

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