Café Economía e Inauguración del Rincón Saludable de la Escuela
Imperfect bank competition, borrower adverse selection, and the transmission of monetary policy
This paper studies bank competition with borrower adverse selection. In the model, expected non-performing loan costs are high when credit is granted in booms, when risk free rates are low, or when competition is strong. I prove that full competition is suboptimal due to this last effect; that more competition improves the transmission of monetary policy, and that lending rates are always pro-cyclical. The paper examines the relative plausibility of sequential and simultaneous bank competition. I show that with asymmetric costs, bank market shares are always inversely related to their efficiency, and that bank entry does not always lower lending rates.
Autoría: Miguel Cantillo Simon