Friday, October 30, 2015

Bank Competition, Borrower Competition and Interest Rates

Carlos Bellon, Universidad Carlos III de Madrid Bank discusses Competition, Borrower Competition and Interest Rates.

ABSTRACT: The effect bank competition has on interest rates should depend on the fact that borrowers compete against each other. The borrowing rate of a firm affects its ability to compete in the industrial marketplace, and ultimately, its ability to repay its loans. Thus, competition amongst borrowers acts as a limit to the amount of rents financial oligopolists can extract. I find evidence that firms that operate within areas of limited bank competition face higher rates than their peers. I also identify an innovative control group that can be used in tests of bank market structure.

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