Debt Concentration and Bargaining Power: Large Banks, Small Banks, and Secondary Market Prices

Raquel Fernandez and Sule Ozler

International Economic Review, 1999, vol. 40, issue 2, 333-55

Abstract: Commercial bank debts of developing countries are held by large international banks and smaller domestic banks. This paper investigates how debt concentration--the proportion of a country's debt held by large banks relative to small banks--affects the secondary market price for these loans. We find that countries with higher concentrations have higher secondary-market prices. We explain this empirical finding in a bargaining model that endogenizes the maximum penalty that banks can credibly impose on a recalcitrant debtor. We show that the banks' bargaining power increases with the degree of debt concentration, thus increasing repayment and secondary-market prices. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Date: 1999
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