Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy

Miguel Cantillo ()
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Miguel Cantillo: Universidad de Costa Rica

No 202301, Working Papers from Universidad de Costa Rica

Abstract: 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.

Keywords: Bank competition; transmission of monetary policy; Cournot competition; adverse selection in credit markets. (search for similar items in EconPapers)
Pages: 34 pages
Date: 2023-03, Revised 2023-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-com, nep-fdg and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fcr:wpaper:202301

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