1. Market Concentration and the Cost of Bank Borrowing Fabián Duarte, SBIF y Banco Central Andrea Repetto, Universidad de Chile Rodrigo Valdés, Banco Central

2. Motivation In the last three decades, the Chilean banking industry has undergone a series of changes. In 1990, there were 40 banks and the combined market share of the largest four was about 49%. In 2002, the number of banks had dropped to 26 and the market share of the largest four was almost 60%. What are the effects of increased bank concentration on clients?

3. Motivation Results show that bank concentration has heterogeneous effects on firms. A key variable is whether firms hold loans from single or multiple lenders. This is consistent with the hypothesis of informational monopolies and switching costs.

4. Motivation Economies of scale Selection of the best producers Market power Informational monopoly

5. Outline Stylized facts about the Chilean banking industry Data Concentration Mergers Concluding remarks What’s next

6. Stylized facts about the market

7. Stylized facts about the market Stylized facts about the market Number of Banks Institutions Chile, 1990-2002 20 25 30 35 40 45 1990199119921993199419951996199719981999200020012002

8. Stylized facts about the market

9. Data The data come from two sources: SBIF and ENIA There are 8,000 observations and 1,000 firms SBIF: Data on debt given by RUT ENIA: Data on manufacturing firms

10. Data Problems: ENIA only represents manufacturing activity The paid interest includes non-bank related debt ENIA represents plants, not firms

11. Data MeanMedianSt.DevMeanMedianSt.Dev All firms881722475370302 By number of employees (size quintiles) I (smallest)15301159522303026262323 II1325223422132292323 III407278552302721 IV450126197338302621 V (largest)344365221013527272220 Borrowing Level and Cost Interest Payments/Debt No exclusionsWith exclusions of outliers Interest Payments/Debt 2626

12. Concentration Our econometric model controls for a number of variables: Number of employees Sales (natural log) Capital stock (natural log) Regional dummies Sectoral dummies Dummy indicating whether the firm has had overdue loans in the past. Proxy for age

13. Concentration

14. Concentration A firm that borrows from a single bank has less bargaining power than a firm that borrows from many banks. The results are consistent with the existence of a hold-up problem: firms that borrow from a single bank pay higher interest rates when the bank takes hold a larger market share.

15. Mergers

16. Mergers Compare the difference in a specified variable before and after the treatment for the affected and unaffected groups. Important: Treatment should be exogenous for the affected individuals. We cannot identify an exogenous treatment using aggregate data. Difference in Difference

17. Mergers Formally, the equation we will use is: The effect of the merger is identified by estimating

18. Mergers Merged Bank A Merged Bank B Others Banks C, D,E… Firm 1 Firm 2 Firm 3 Firm 5 Firm 6 Firm 7 Firm 8 Firm 4

19. Mergers

20. Mergers

21. Concluding Remarks The firms that suffer the most are those that borrowed exclusively from the banks that later merge together. These firms are worse off than firms that also borrowed from one bank.

22. Concluding Remarks The results are consistent with the notion that firms that borrow from just one bank have the least bargainig power, as their ability to quickly switch banks is limited by switching costs and by ex-post informational monopoly. Consistent with the fact that mergers may have larger effects on borrowers than equivalent changes occurring through continuum of small events.

23. What’s next Dynamics: Permanent or temporary effects. Effects on the clients of acquired banks. Probability of changing banks due to a merger (voluntarily or because of denied credit). Reduce the sample to specific firms.