Template-Type: ReDIF-Paper 1.0
Author-Name: Gustavo Joaquim
Author-X-Name-First: Gustavo
Author-X-Name-Last: Joaquim
Author-Name: Bernardus Doornik
Author-X-Name-First: Bernardus
Author-X-Name-Last: Doornik
Author-Name: José Renato Haas Ornelas
Author-X-Name-First: José Renato
Author-X-Name-Last: Haas Ornelas
Title: Bank competition, cost of credit and economic activity: evidence from Brazil
Abstract: We use heterogeneous exposure to large bank mergers to estimate the effect of bank competition on both financial and real variables in local Brazilian markets. Using detailed administrative data on loans and firms, we employ a difference-in-differences empirical strategy to identify the causal effect of bank competition. Following M&A episodes, spreads increase and there is persistently less lending in exposed markets. We also find that bank competition has real effects: a 1% increase in spreads leads to a 0.2% decline in employment. We develop a tractable model of heterogeneous firms and concentration in the banking sector. In our model, the semi-elasticity of credit to lending rates is a sufficient statistic for the effect of concentration on credit and output. We estimate this elasticity and show that the observed effects in the data and predicted by the model are consistent. Among other counterfactuals, we show that if the Brazilian lending spread were to fall to the world level, output would increase by approximately 5%.
Creation-Date: 2023-10
File-URL: https://www.bis.org/publ/work1134.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1134.htm
File-Format:1134
Keywords: bank competition, mergers and acquisitions, lending, spreads, output
Classification-JEL: G21, G34, E44
Handle: RePEc:bis:biswps:1134