This paper examines the reciprocal lending between Financial Conglomerates in the repo market to better understand both what motivates powerful firms to engage in this type of contemporaneous crossfunding relationships, and, on the other hand, some of the implications that such reciprocal transactions may entail for the agents involved and for the market as a whole. In particular, in terms of the implications we focus on two dimensions: first, the potential effects that reciprocal lending has on the market power of FCs and the competitiveness of the repo market for mutual funds and second, the potential implications that frequent and stable reciprocal lending can have in terms of the industry's systemic risk. Using transaction-level data from the Mexican repo market, we show that reciprocal lending between financial conglomerates is mutually beneficial as it reduces search costs for borrowers and mitigates credit risk concerns for lenders. Further, we find that reciprocal lending favors market concentration of the repo lending in a few powerful funds and increases fund market power. Finally, we find that reciprocal lending also leads to centrality within the financial network and increases the dependence between the parties involved. Interestingly, a higher intensity of reciprocal lending can harmful, but this does not necessarily deteriorates financial stability.
This paper examines the effects of supermarket loyalty programs on the demand for private labels (PLs). Using transaction level data on grocery purchases and individual level information on the membership of loyalty programs, I estimate a model of demand in which membership may affect the consumers' valuation for PLs, their sensitivity to price changes and have spillover effects on both named brands (NBs) and rivals' PLs. My identification strategy of the membership effect exploits observed variation in shopping patterns at the consumer level over time and across customer types (i.e., members and non-members) in each period to control for as much exogenous variation as possible, and includes a control function using characteristics of loyalty programs as instrumental variables to account for a potential selection bias related to unobserved factors of the membership decision. I find a significant effect of loyalty programs on consumer preferences for PLs. Compared to non-members, membership reduces consumers' price sensitivity for the products sold by the supermarket they are members of, but increases it for products sold by supermarkets they are not members of. These effects are weaker for households that are members of the loyalty programs of multiple supermarkets. Counterfactual simulations show that when a supermarket modifies its loyalty program while competitors keep their own unchanged, it loses about 19% of customers to its rivals, on average. Furthermore, if loyalty programs were changed altogether, the demand for PLs would considerably decrease, while the demand for NBs would increase.
We examine how market structure, market power, and systemic risk respond to close and intense lending relationships between financial conglomerates (FCs) in non-centrally cleared bilateral repo. Using transaction-level data from Mexico, we document persistent and stable funding relationships between FC-affiliated banks and funds with two distinctive features: first, funding transactions are two-way, that is, a given pair of rival FCs provide lending to one another on the same day; second, two-way transactions are executed at lower average rates than one-way transactions. We show that two-way lending between FCs favours both market concentration and market power of FC-affiliated funds, and worsens the terms of trade of independent banks’ and funds’ lending. Furthermore, we find that the bank-level contribution to systemic risk increases with two-way lending.
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