Bank Competition, Cost of Credit and Economic Activity: evidence from Brazil

We estimate the effect of bank competition on financial and real variables. To do so, we use regional heterogeneous exposure to mergers and acquisitions (M&A) of large banks as an instrument for changes in competition of local banking markets in Brazil. We use detailed administrative data on loa...

Full description

Saved in:
Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Gustavo Joaquim, Bernardus Van Doornik, Ornelas, José Renato
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2019
Subjects
Banking
Brazil
Online AccessGet full text

Cover

More Information
Summary:We estimate the effect of bank competition on financial and real variables. To do so, we use regional heterogeneous exposure to mergers and acquisitions (M&A) of large banks as an instrument for changes in competition of local banking markets in Brazil. We use detailed administrative data on loans and firms and a difference-in-differences empirical strategy that compares changes in outcomes for markets affected or not by the M&A episodes. We find that, following M&A episodes, spreads increase and lending decreases persistently in exposed markets relative to controls. We show that this is larger for more concentrated markets at the time of the M&A episode, and is unlikely to be driven by other factors, such as branch closures. We find that non-agricultural employment falls .2% for an increase of 1% in spreads. We develop a model of heterogeneous firms and concentration in the banking sector that is consistent with the micro evidence. In our model, the semi-elasticity of credit to lending rates is a sufficient statistic for the effect of concentration on output, which we estimate to be -3.17. Among other counterfactuals, we show that if Brazilian spreads fell to world levels, output would increase by approximately 5%.