1 Market Concentration and the Cost of Borrowing Comments Arturo Galindo IDB Cartagena, December

2 General Comments The Duarte, Repetto, Valdés paper The Latin American context Comments and suggestions

3 The Duarte et. al. paper Analyzes the impact of bank concentration on the cost of borrowing in Chile Uses a novel dataset that matches firm characteristics with financial information Studies –the impact of the evolution of concentration on firm level cost of financing –The dynamics of financing costs around mergers

4 The Duarte et. al. paper The paper concludes –Bank concentration has different impacts on firms with different borrowing structures Reduces funding costs for firms that have more than two lenders Increases funding costs for firms that have only one lender –The results from the D-D are not robust

5 The Context The paper asks a crucial question not only for Chile but for the whole Latin American Region An increase in concentration is a wide spread phenomenon and there is little work on its impact

6 The Context

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9 The context Concentration has taken place in the context of: –Financial liberalization + foreign bank entry –Privatization following crises Analyzing the impact of concentration is a key task.

10 Comments and Suggestions General comments –There are some recent pieces of literature that address issues related with this paper. Many of them support their findings –Concentration vs competition For LAC –Levy Yeyati and Micco (2003) based on Panzar and Rosse’s (1987) methodology, suggest that competition in LAC has increased. They find that performance measures such as the NIM have improved with concentration –They also show that concentration is strongly correlated with foreign bank entry.

11 Comments and Suggestions For other regions –Petersen and Rajan (1995) show that financial conditions for US firms improve in more concentrated systems –Using data for Italy Bonaccorsi di Patti and Dell’Ariccia (2000) show that concentration has a non linear effect on firm’s growth. Positive when concentration is low, negative when it is high. (Depends on the degree of opaqness of the industry). –Bonaccorsi di Patti and Gobbi (2001) find that concentration has a positive effect for SMEs but negative for large firms. –Using data for 41 countries Cetorelli and Gamberra (2001) find that concentration promotes the growth rate of sectors that rely on external finance. –Beck, Demirguç Kunt and Maksimovic (2003) find that concentration reduces access to credit, particularly for SMEs

12 Comments and Suggestions There is concern that foreign bank entry has led to market segmentation and the exclusion of certain sectors (SME) out of the credit market. Is this relevant for Chile? –Clarke et al (2000) analyze FBs in Argentina, Chile, Colombia and Peru. Show that FBs lend less to small debtors. Mainly small FBs. In Chile they find that large FBs lend more to SMEs –Using a sample of 36 developing countries IDB (2005) that greater FB presence reduces access to credit by small borrowers

13 Comments and Suggestions Specific questions: –In the empirical tests you identify the impact of bank concentration on firms with different number of lenders. Is it worth exploring other sample separations such as the size of firms which has been amply studied in other countries? Or the whole borrowing structure of firms (lower impact on firms that have alternative sources of funding different from banks, such as ADRs, trade credit, belonging to and economic group, etc.) –Does it matter if a foreign bank is one of the parties involved in a M&A?

14 Comments and Suggestions Specific questions: –In the estimation you do not incorporate the direct effect of number of lenders. Are you capturing this direct effect or the effect of the interaction with concentration? –When eliminating outliers, how many firms were dropped? It would be useful to report this to understand a bit more about the quality of the data. –Can the impact of concentration be non linear as suggested by Bonaccorsi di Patti and Dell’Ariccia? –In the controls in table 2, overdue loans are not significant. This may occur because it enters non linearly in credit scoring models. It is difficult to capture this with the dummy. –For robustness, why not try an additional specification with firm fixed effects (dropping some of the current controls) in order to guarantee that you are controlling for unobserved heterogeneity.

15 Comments and Suggestions On the D-D. –The paper could explain better what is done. –How do you interpret the coefficients of T5? –The authors report that the impact of the M&A is very large compared to the previous results. How large? The significant results appear suspiciously large. Does column 2 of T5 imply that interest rates in firm 1 are 23 percentage points higher than those in firm 3? –In T5 it would be useful to report some regression statistics, and the coefficients on dt and ds.