Market Concentration and the
Cost of Borrowing
Comments
Arturo Galindo
IDB
Cartagena, December 3-4 2004
1
General Comments
• The Duarte, Repetto, Valdés paper
• The Latin American context
• Comments and suggestions
2
The Duarte et. al. paper
• Analyzes the impact of bank concentration on the
cost of borrowing in Chile
• Uses a novel dataset that matches firm
characteristics with financial information
• Studies
– the impact of the evolution of concentration on firm
level cost of financing
– The dynamics of financing costs around mergers
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The Duarte et. al. paper
• The paper concludes
– Bank concentration has different impacts on
firms with different borrowing structures
• Reduces funding costs for firms that have more than
two lenders
• Increases funding costs for firms that have only one
lender
– The results from the D-D are not robust
4
The Context
• The paper asks a crucial question not only
for Chile but for the whole Latin American
Region
• An increase in concentration is a wide
spread phenomenon and there is little work
on its impact
5
The Context
6
The Context
7
The Context
8
The context
• Concentration has taken place in the context
of:
– Financial liberalization + foreign bank entry
– Privatization following crises
• Analyzing the impact of concentration is a
key task.
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Comments and Suggestions
• General comments
– There are some recent pieces of literature that address
issues related with this paper. Many of them support
their findings
– Concentration vs competition
• For LAC
– Levy Yeyati and Micco (2003) based on Panzar and Rosse’s
(1987) methodology, suggest that competition in LAC has
increased. They find that performance measures such as the NIM
have improved with concentration
– They also show that concentration is strongly correlated with
foreign bank entry.
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Comments and Suggestions
• For other regions
– Petersen and Rajan (1995) show that financial conditions for US
firms improve in more concentrated systems
– Using data for Italy Bonaccorsi di Patti and Dell’Ariccia (2000)
show that concentration has a non linear effect on firm’s growth.
Positive when concentration is low, negative when it is high.
(Depends on the degree of opaqness of the industry).
– Bonaccorsi di Patti and Gobbi (2001) find that concentration has a
positive effect for SMEs but negative for large firms.
– Using data for 41 countries Cetorelli and Gamberra (2001) find
that concentration promotes the growth rate of sectors that rely on
external finance.
– Beck, Demirguç Kunt and Maksimovic (2003) find that
concentration reduces access to credit, particularly for SMEs
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Comments and Suggestions
• There is concern that foreign bank entry has led to
market segmentation and the exclusion of certain
sectors (SME) out of the credit market.
• Is this relevant for Chile?
– Clarke et al (2000) analyze FBs in Argentina, Chile,
Colombia and Peru.
• Show that FBs lend less to small debtors. Mainly small FBs. In
Chile they find that large FBs lend more to SMEs
– Using a sample of 36 developing countries IDB (2005)
that greater FB presence reduces access to credit by
small borrowers
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Comments and Suggestions
• Specific questions:
– In the empirical tests you identify the impact of bank
concentration on firms with different number of
lenders.
• Is it worth exploring other sample separations such as the size
of firms which has been amply studied in other countries?
• Or the whole borrowing structure of firms (lower impact on
firms that have alternative sources of funding different from
banks, such as ADRs, trade credit, belonging to and economic
group, etc.)
– Does it matter if a foreign bank is one of the parties
involved in a M&A?
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Comments and Suggestions
• Specific questions:
– In the estimation you do not incorporate the direct effect of number
of lenders. Are you capturing this direct effect or the effect of the
interaction with concentration?
– When eliminating outliers, how many firms were dropped? It
would be useful to report this to understand a bit more about the
quality of the data.
– Can the impact of concentration be non linear as suggested by
Bonaccorsi di Patti and Dell’Ariccia?
– In the controls in table 2, overdue loans are not significant. This
may occur because it enters non linearly in credit scoring models.
It is difficult to capture this with the dummy.
– For robustness, why not try an additional specification with firm
fixed effects (dropping some of the current controls) in order to
guarantee that you are controlling for unobserved heterogeneity.
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Comments and Suggestions
• On the D-D.
– The paper could explain better what is done.
– How do you interpret the coefficients of T5?
– The authors report that the impact of the M&A is very
large compared to the previous results. How large? The
significant results appear suspiciously large. Does
column 2 of T5 imply that interest rates in firm 1 are 23
percentage points higher than those in firm 3?
– In T5 it would be useful to report some regression
statistics, and the coefficients on dt and ds.
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