Market Concentration and the Cost of Bank Borrowing

1. Market Concentration and the Cost of Bank Borrowing Fabián Duarte, SBIF y Banco Central Andrea Repetto, Universidad de ChileRodrigo Valdés, Banco Central

2. Motivation In the last three decades, the Chilean banking industry has undergone a series of changes.In 1990, there were 40 banks and the combined market share of the largest four was about 49%. In 2002, the number of banks had dropped to 26 and the market share of the largest four was almost 60%.What are the effects of increased bank concentration on clients?

3. Motivation Results show that bank concentration has heterogeneous effects on firms. A key variable is whether firms hold loans from single or multiple lenders. This is consistent with the hypothesis of informational monopolies and switching costs.

4. Motivation Economies of scaleSelection of the best producersMarket powerInformational monopoly

5. Stylized facts about the Chilean banking industryDataConcentrationMergersConcluding remarksWhat’s next Outline

6. Stylized facts about the market

7. Number of Banks Institutions Chile, 1990-2002 45 40 35 30 25 20 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Stylized facts about the market

8. Stylized facts about the market

9. Data The data come from two sources: SBIF and ENIAThere are 8,000 observations and 1,000 firmsSBIF: Data on debt given by RUTENIA: Data on manufacturing firms

10. Data Problems:ENIA only represents manufacturing activityThe paid interest includes non-bank related debt ENIA represents plants, not firms

11. Data BorrowingLevel and Cost No exclusions With exclusions of outliers Interest Payments/Debt Interest Payments/Debt Mean Median St.Dev Mean Median St.Dev All firms 8817 22 475370 30 22 26 By numberof employees (size quintiles) I (smallest) 1530 11 59522 30 26 23 II 1325 22 34221 32 29 23 III 407 27 8552 30 27 21 IV 4501 26 197338 30 26 21 V (largest) 344365 22 1013527 27 22 20

12. Concentration Our econometric model controls for a number of variables: Number of employees Sales (natural log) Capital stock (natural log) Regional dummies Sectoral dummies Dummy indicating whether the firm has had overdue loans in the past. Proxy for age

13. Concentration

14. Concentration A firm that borrows from a single bank has less bargaining power than a firm that borrows from many banks. The results are consistent with the existence of a hold-up problem: firms that borrow from a single bank pay higher interest rates when the bank takes hold a larger market share.

15. Mergers

16. Difference in Difference Mergers Compare the difference in a specified variable before and after the treatment for the affected and unaffected groups.Important: Treatment should be exogenous for the affected individuals. We cannot identify an exogenous treatment using aggregate data.

17. Mergers Formally, the equation we will use is: The effect of the merger is identified by estimating

18. Merged Bank A Firm 1 Firm 2 Merged Bank B Firm 3 Firm5 Others Banks C, D,E… Firm 7 Firm 6 Firm 8 Mergers Firm 4

19. Mergers

20. Mergers

21. Concluding Remarks The firms that suffer the most are those that borrowed exclusively from the banks that later merge together.These firms are worse off than firms that also borrowed from one bank.

22. Concluding Remarks The results are consistent with the notion that firms that borrow from just one bank have the least bargainig power, as their ability to quickly switch banks is limited by switching costs and by ex-post informational monopoly. Consistent with the fact that mergers may have larger effects on borrowers than equivalent changes occurring through continuum of small events.

23. Dynamics: Permanent or temporary effects.Effects on the clients of acquired banks.Probability of changing banks due to a merger (voluntarily or because of denied credit).Reduce the sample to specific firms. What’s next