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 10 (dominant) banks have over 55 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.

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. We find that requiring banks to garner explicit consent prior to raising clients' credit limits leads to riskier borrowers disproportionately consenting. This introduces a new form of adverse selection. In response, we find 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 reduced lender profits but had negligible effects for consumers. Our counterfactuals demonstrate that under contractionary monetary policy requiring consumer consent would decrease both the frequency and size of limit increases.