A Quantitative Model of Bank Mergers with Dean Corbae and Pablo D'Erasmo  |  Slides

Abstract: We develop a simple model of the bank merger process to study the rise in bank concentration following the deregulation of bank branching in the Riegle-Neal Act of 1994. Motivated by the data where currently 4 (dominant) banks have over 40 percent of the U.S. deposit market share while the remaining over 4000 (fringe) banks cover the rest, we apply a dominant-fringe framework with a merger stage to model the rise in concentration following the change in regulation making interstate branching possible. We study the effect of the merger wave on competition, efficiency, and stability of the banking industry. We focus on the heterogeneous response of big and small banks’ lending to idiosyncratic deposit shocks (i.e. their marginal propensity to lend) and how this translates to granularity we document in the banking industry. Further, we examine how the effectiveness of monetary policy varies with rising loan market power.

Adverse Selection and Learning in Consumer Credit Markets with Minnie Cui

Abstract: This paper highlights a trade-off in credit markets between regulatory safeguards for informed consent and the informational frictions they can amplify. In our empirical setting, we find that requiring banks to garner explicit consent prior to raising clients’ credit limits induces disproportionately higher take-up among riskier borrowers, worsening the risk profile of accounts receiving limit increases. In response, we find that banks decreased the size of the average credit limit increase and simultaneously gave more frequent limit increases. We develop a precautionary savings model with endogenous credit limits to study the role of learning and adverse selection in markets with incomplete information. We show that learning from acceptance decisions can rationalize our empirical results. Our model suggests that requiring consumer consent had negligible effect on consumer surplus but led to a slight decline in lender profits. Our key counterfactual demonstrates that the decline in credit provision from requiring consumer consent would be amplified with less patient lenders.