Template-Type: ReDIF-Paper 1.0
Author-Name: Thiago Christiano Silva
Author-X-Name-First: Thiago Christiano
Author-X-Name-Last: Silva
Author-Name: Sergio Rubens Stancato de Souza
Author-X-Name-First: Sergio Rubens
Author-X-Name-Last: Stancato de Souza
Author-Name: Solange Maria Guerra
Author-X-Name-First: Solange Maria
Author-X-Name-Last: Guerra
Title: Covid-19 and market power in local credit markets: the role of digitalization
Abstract: This paper investigates how COVID-19 and digitalization affected the market power in local Brazilian credit markets. We first propose a novel methodology to estimate bank market power at the local level. We design a data-intensive local version of the Lerner index by developing heuristics to allocate national-level banks' inputs, products, and costs across their branches using large-scale datasets from many sources. We then exploit the exogenous variation in COVID-19 intensity across Brazilian localities to analyze how the pandemic influenced local market power through the effective price and marginal cost channels. Despite reducing the economic activity, COVID-19 did not impact the effective price channel: bank branches offset the decrease in credit income by reducing credit concessions. However, bank branches more affected by COVID-19 experienced increased marginal costs as they could not rapidly adjust their cost factors in response to the decrease in credit concessions. Consequently, COVID-19 reduced banks' local market power via the marginal cost channel. More digitalized bank branches enjoy cost and lending flexibility: they experience less stickiness in their cost structure and complement the reduced credit concessions in localities more affected by COVID-19 by extending credit to borrowers in remote localities less affected. Consequently, more digitalized banks improve their market power compared to traditional banks. This paper provides new insights into how crises can affect local market power in non-trivial ways.
Length: 70 pages
Creation-Date: 2022-05
File-URL: https://www.bis.org/publ/work1017.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1017.htm
File-Format: text/html
Number: 1017
Keywords: COVID-19, market power, digitalization, information technology, Lerner index
Classification-JEL: C58, D22, D40, G21, I19, O31
Handle: RePEc:bis:biswps:1017