Informational Switching Costs, Bank Competition and the Cost of Finance

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Author
Soares da Silva, Marcos ;
Nazar Van Doornik, Bernardus Ferdinandus
Date issued
Jul 2020
Subject
Financial Institution;
Loan Operation;
Credit Market;
Interest Rate;
Commercial Bank;
Credit Line
JEL code
L14 - Transactional Relationships • Contracts and Reputation • Networks;
G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages;
L10 - Market Structure, Firm Strategy, and Market Performance: General;
D43 - Oligopoly and Other Forms of Market Imperfection
Country
Brazil
Category
Working Papers
This paper studies the links between competition in the lending market and spreads of bank loans in Brazil. Evidence from a dataset of more than 13 million loan-level observations from private banks shows a positive relationship between market power, measured by the Lerner index, and the cost of finance, measured by spreads over the treasury curve. Furthermore, there is evidence of the holdup problem, originating from informational switching costs faced by firms. Private banks engage in a strategy of first competing fiercely for clients by offering a lower loan interest rate and later increasing interest rates as the bank-firm relationship duration increases. Both results are stronger for micro and small firms than for medium and large firms.
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