The Impact of the Banking Competition in Funding and Lending Markets on Lending Technology

Jung-Hyun Ahn

Revue économique, 2016, vol. 67, issue 6, 1117-1139

Abstract: During the last decades, banks have expanded the use of credit scoring technology to grant loan, challenging traditional relationship lending. I investigate the relationship between banking competition and technological change in lending, and its implications for efficiency. I consider a double Bertrand competition model, where banks compete both in one funding market and in two heterogeneous loan markets, and analyze the competition between banks employing different lending technologies. I show that competition may lead to inefficiency. This happens when a bank overbids in the funding market to enjoy monopoly power in all loan markets, and one of the markets is served by less efficient technology.

Date: 2016
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