Financial Structure and Monetary Policy with Competing Lenders

SSRN Electronic Journal

This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.

Eastern Economic Journal, 2011

Journal of Banking & Finance, 2014

This paper examines how competition influences the bank lending channel in the euro area countries. Using a large panel of banks from 12 euro area countries for the period 2002-2010 we analyze the reaction of loan supply to monetary policy actions depending on the degree of bank competition. We find that the effect of monetary policy on bank lending is dependent on bank competition: the transmission of monetary policy via the bank lending channel is less pronounced for banks with extensive market power. Further investigation shows that banks with less market power were more sensitive to monetary policy only before the financial crisis. These results suggest that bank market power has a significant impact on the effectiveness of monetary policy. Therefore, wide variations in the level of bank market power may lead to asymmetric effects of the single monetary policy.

The paper presents a model of endogenous credit allocation with heterogeneous lenders. We consider three classes of agents' -firms, individual investors and banks. Banks differ according to their level of capital and monitoring technology. In a setting of moral hazard with limited liability, we stress that firms' ability to obtain external funds is conjointly determined by their own wealth, bank capital, and monitoring technology. We show that small (medium) firms invest with the small (large) bank and pay a high (low) interest rate whereas large firms are financed by the financial market. Moreover, we stress that restrictive monetary policy leads to a contraction in aggregate investment and to a credit reallocation mechanism, between the two banks and the market, similar to a "flight to quality" effect. This restrictive policy has a strong effect not on bank-dependent firms but on small bank-dependent firms.

I would like to thank Bruno Biais for his helpful comments. Thanks also to Helmuth Cremer and Jean-Charles Rochet for valuable remarks.

RePEc: Research Papers in Economics, 2007

Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the resulting impact of the bank lending channel on output-inflation trade-offs is quantitatively small and of ambiguous sign. When bank capital varies counter cyclically and bank loan rates have a relatively large impact on marginal costs, variation of bank loan margins improves monetary policy trade-offs. The new Basel accord, by increasing capital requirements during economic downturns, offsets this beneficial impact.

Topics in Macroeconomics, 2000

We examine bank lending decisions in an economy with spillover effects in the creation of new investment opportunities and asymmetric information in credit markets. We examine pricesetting equilibria with horizontally differentiated banks. If bank lending takes place under a weak corporate governance mechanism and is fraught with agency problems and ineffective bank monitoring, then an equilibrium emerges in which loan supply is strategically restricted. In this equilibrium, the loan restriction, the "under-lending" strategy, provides an advantage to one bank by increasing its market share and sustaining monopoly interest rates. The bank's incentives for doing so increase under conditions of increased volatility of lending capacities of banks, more severe borrower-side moral hazard, and lower returns on the investment projects. Although this equilibrium is not always unique, with poor bank monitoring and corporate governance, a more intense banking competition renders the bad equilibrium the unique outcome.

2010

We analyze optimal monetary policy in a model where borrowing is subject to collateral constraints and credit ‡ows are intermediated by a monopolistically competitive banking sector. We show that, under certain conditions and up to a second order approximation, welfare maximization is equivalent to stabilization of four goals: in ‡ation, output gap, the consumption gap between constrained and unconstrained consumers, and the distribution of the collateralizable asset between both groups. Following both productivity and creditcrunch shocks, the optimal monetary policy commitment implies a short-run trade-o¤ between these goals. Finally, such trade-o¤s become ampli…ed as banking competition increases, due to the increase in …nancial leveraging.

1994

for helpful comments and Tom Brennan for excellent research assistance.

Journal of Money, Credit and Banking, 2012

This paper identifies a monetary policy channel through the risk pricing of bank debt in the market for jumbo certificates of deposit (jumbo CDs). Adverse policy shocks increase debt holder perceptions of bank default, increasing the risk premia for some banks, thereby decreasing their external funding of loans. The results show that contractionary policy increases the sensitivity of jumbo-CD spreads to leverage and asset risk for small banks, and to leverage for large banks. The results also show a distributional and aggregate effect on banking system jumbo CDs and total loans, producing a risk-pricing (or market discipline) channel. This channel has implications for monetary and regulatory policies, and financial stability. JEL codes: E44, E52, G21, G28 Keywords: bank lending channel, risk-pricing channel, market discipline channel, credit channel, risk-taking channel.