Informational switching costs, bank competition, and the cost of finance

Jose Ornelas, Marcos Soares da Silva and Bernardus Van Doornik

No 990, BIS Working Papers from Bank for International Settlements

Abstract: This paper studies the links between competition in the lending market and spreads of bank loans in Brazil. Evidence from a dataset of more than 13 million loan-level observations from private banks shows a positive relationship between market power, measured by the Lerner index, and the cost of finance, measured by loan spreads over the treasury curve. Furthermore, there is evidence of the holdup problem, originating from informational switching costs faced by firms. Private banks engage in a strategy of first competing fiercely for clients by offering a lower loan interest rate and later increasing interest rates as the bank-firm relationship duration increases. Both results are stronger for micro and small firms than for medium and large firms.

Keywords: banking; Competition; switching costs; information asymmetry; holdup problem; lock-in. (search for similar items in EconPapers)
JEL-codes: D43 G21 L10 L14 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2022-01
New Economics Papers: this item is included in nep-com, nep-ind and nep-ore
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Informational switching costs, bank competition, and the cost of finance (2022)
Working Paper: Informational Switching Costs, Bank Competition and the Cost of Finance (2020)
Working Paper: Informational Switching Costs, Bank Competition and the Cost of Finance (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:990

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