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Leo Kaas

5 November 2004
WORKING PAPER SERIES - No. 403
Details
Abstract
The paper analyzes how the removal of barriers to entry in banking affect loan competition, bank stability and economic welfare. We consider a model of spatial loan competition where a market that is served by less efficient banks is opened to entry by banks that are more efficient in screening borrowers. It is shown that there is typically too little entry and that market shares of entrant banks are too small relative to their socially optimal level. This is because efficient banks internalize only the private but not the public benefits of their better credit assessments. Only when bank failure is very likely or very costly, socially harmful entry can occur.
JEL Code
D43 : Microeconomics→Market Structure and Pricing→Oligopoly and Other Forms of Market Imperfection
D82 : Microeconomics→Information, Knowledge, and Uncertainty→Asymmetric and Private Information, Mechanism Design
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
Network
ECB-CFS Research Network on "Capital Markets and Financial Integration in Europe"