Premium
A Simple Model of Banking Competition With Bank Size Heterogeneity and Lending Spillovers
Author(s) -
Heddergott Daniel,
Laitenberger Jörg
Publication year - 2017
Publication title -
economic notes
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.274
H-Index - 19
eISSN - 1468-0300
pISSN - 0391-5026
DOI - 10.1111/ecno.12083
Subject(s) - competition (biology) , spillover effect , homogeneous , business , market structure , monetary economics , financial system , economics , industrial organization , microeconomics , ecology , physics , biology , thermodynamics
We develop a multimarket spatial competition model in which large banks compete with small banks for transparent and opaque borrowers. Opaque borrower lending is influenced by a spillover from transparent borrower markets that depends on the structure of the banking market and is transmitted by banks’ risk‐bearing capacities. Consistent with diverse empirical findings, the structure of the banking market determines whether competition improves credit access (small bank dominated markets) or reduces bank lending (large bank dominated markets). In sufficiently heterogeneous (homogeneous) banking markets, a U‐shaped (inverse U‐shaped) relationship between credit access and bank competition applies.