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 studies the trade-off between consent-based regulatory safeguards and the informational frictions they can amplify in credit markets. We find that requiring lenders to obtain explicit consent before raising borrower credit limits induces adverse selection. Borrowers who accept are ex post riskier than those whose increases are applied without consent, with higher past-due, delinquent, and charged-off balances. Compliant lenders reduced the size of increases but increased their frequency, which is inconsistent with static models of adverse selection. We use a simple model of credit provision to demonstrate that adverse selection and lender learning are essential to rationalize both empirical patterns.