SEMINAR: Sonny Biswas - The dichotomy of concentration and pricing power in banking

Event details

Author:  Sonny Biswas (Henley)

Abstract: In our model, banks face two informational frictions: limited pledgeability and effort moral hazard. Bankers are ex ante identical, can costlessly offer contracts to depositors, and compete in prices (deposit rates). Yet, strikingly, active bankers charge a mark-up that exceeds the sum of the rents associated with each informational friction in isolation; a positive mass of inactive bankers cannot disrupt the equilibrium despite costless free entry. When pledgeability increases, bankers offer higher deposit rates and accept more deposits, which in turn leads to fewer banks (higher concentration). Thus, counterintuitively, but consistent with empirical evidence, equilibrium pricing power may decline with concentration.

Host: Theo Diasakos (York)

Cluster: Macro Finance