Default and Interest Rate Shocks: Renegotiation Matters

Carlos Esquivel Author-1-Name-First: Carlos Author-1-Name-Last: Esquivel (), Victor Almeida Author-2-Name-First: Victor Author-2-Name-Last: Almeida (), Timothy Kehoe Author-3-Name-First: Timothy Author-3-Name-Last: Kehoe () and Juan Pablo Nicolini Author-4-Name-First: Juan Pablo Author-4-Name-Last: Nicolini ()
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Carlos Esquivel Author-1-Name-First: Carlos Author-1-Name-Last: Esquivel: Rutgers University
Victor Almeida Author-2-Name-First: Victor Author-2-Name-Last: Almeida: Carleton College
Timothy Kehoe Author-3-Name-First: Timothy Author-3-Name-Last: Kehoe: University of Minnesota
Juan Pablo Nicolini Author-4-Name-First: Juan Pablo Author-4-Name-Last: Nicolini: Federal Reserve Bank of Minneapolis and Universidad Torcuato Di Tella

Departmental Working Papers from Rutgers University, Department of Economics

Abstract: We consider how size matters for banks in three size groups: small community banks with assets less than $1 billion, large community banks with assets between $1 billion and $10 billion, and midsize banks with assets between $10 billion and $50 billion. To illustrate the differences between these banks and larger banks whose business models are distinctly different, we examine large banks with assets between $50 billion and $250 billion and the largest banks with assets exceeding $250 billion. Community banks have potential advantages in relationship lending compared with large banks. However, increases in regulatory compliance and technological burdens may have disproportionately increased community banks’ costs, raising concerns about small businesses’ access to credit. Our evidence suggests several patterns: (1) while small community banks exhibit relatively more valuable investment opportunities, larger community banks, midsize banks, and larger banks exploit theirs more efficiently and achieve better financial performance; (2) average operating costs that include costs related to regulatory compliance and technology decrease with size; (3) unlike small community banks, large community banks have financial incentives to increase lending to small businesses; and (4) for business lending and commercial real estate lending, compared with small community banks, large community banks, midsize banks, and larger banks assume higher inherent credit risk and exhibit more efficient lending. Thus, concern that small business lending would be adversely affected if small community banks find it beneficial to increase their scale is not supported by our results.

Keywords: Sovereign Default; Renegotiation; Interest Rate Shocks (search for similar items in EconPapers)
JEL-codes: F34 F41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2024-11-12
New Economics Papers: this item is included in nep-ban and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:202405

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