The Effects of Competition in Consumer Credit Markets

Abstract

This paper finds that banks and nonbanks respond differently to increased competition in consumer credit markets. Increased competition and a greater threat of failure induces banks to specialize in relationship business lending, and surviving banks are more profitable. However, nonbanks change their credit policy when faced with more competition and expand credit to riskier borrowers at the extensive margin, resulting in higher default rates. These results show how the effects of competition depend on the form of intermediation. They also suggest that increased competition can cause credit risk to migrate outside the traditional supervisory umbrella.

Competencia en el mercado de crédito entre los bancos dominantes en México

“…Recientemente, Gissler et al (2020) encuentran empíricamente que los bancos y las entidades no bancarias responden de manera diferente al aumento de la competencia en los mercados de crédito. El aumento de la competencia y una mayor amenaza de quiebra inducen a los bancos a especializarse en préstamos comerciales de relación, y los bancos supervivientes son más rentables.…”

Financial institution objectives and auto loan pricing: Evidence from the survey of consumer finances

“…Emmons and Schmid (2000) suggest that banks and credit unions directly affect each other's competitive positions in local deposit markets. Gissler et al (2020) find that increased competition from credit unions in local markets increases the probability of failure among competing banks and induces banks to specialize more in relationship business lending. Tokle and Tokle (2000) find that bank deposit rates are higher in areas with a higher concentration of credit union deposits.…”

Learning About Competitors: Evidence From SME Lending

“…Murfin and Pratt (2017b) show that market power is important to understand the large share of captive lenders in equipment financing. A number of recent papers study the effect of competition on consumer credit markets: Gissler et al (2018) and Argyle et al (2017b) focus on auto loans, while Foley et al (2018) and Nelson (2017) study credit cards, and Dell'Ariccia et al 2012and Palmer (2015) the mortgage market. On the other hand, we focus on loans to small and medium enterprises (Rice and Strahan, 2010).…”