Differentiated attributes and service-quality competition as sources of portfolio interdependence and diverging scales in banking

Enzo Dia and David VanHoose

Economics Letters, 2022, vol. 219, issue C

Abstract: Why are banks’ asset–liability decisions interdependent, and why do we observe both large and small banks? We introduce convex costs in a model with both horizontal and vertical quality differentiation, finding that, as long as a single bank spends on quality attributes, strategic quality rivalry causes the portfolio decisions of all banks to be interconnected, generating portfolio interdependence regarding choices among assets and liabilities at each bank, including banks that forego vertical quality provision. In addition, diseconomies of scale allow banks to remain profitable at different scales of operations.

Keywords: Market power; Loan pricing; Portfolio interdependence; Vertical differentiation (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:219:y:2022:i:c:s016517652200307x

DOI: 10.1016/j.econlet.2022.110823

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