Covid-19 and market power in local credit markets: the role of digitalization

BIS Working Papers  |  No 1017  | 
25 May 2022

This paper was produced as part of the BIS Consultative Council for the Americas (CCA) research conference on The economics of the Covid-19 pandemic.



Studying market power is important, as banks with greater market power tend to charge more from consumers. Although there are differences among a country's local credit markets, market power is typically assessed at the national level. The Covid-19 pandemic was an unexpected shock and affected regions differently. Has it changed banks' market power? Compared with more traditional banks, have more digitalised banks improved their positioning in terms of market power during the pandemic?


We investigate differences in effective prices, marginal costs, credit concessions, credit revenues, and total costs across bank branches. We use these results to determine whether the bank's market power in local credit markets has changed due to the pandemic. We also examine how digitalisation provided cost and lending flexibility, and how these features enabled banks to leverage their market power in local credit markets.


The pandemic had no impact on effective prices but increased the marginal cost of bank branches more affected by Covid-19. This led to a reduction in market power for banks in more affected locations. We also found that branches of more digitalised banks expanded credit beyond their physical locations and were able to adjust their total costs in the short term. As a result, they mitigated the market power loss caused by Covid-19.


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.

JEL classification: C58, D22, D40, G21, I19, O31.

Keywords: COVID-19, market power, digitalization, information technology, Lerner index.