Working Paper: CEPR ID: DP17497
Authors: Claudia Robles-Garcia; Matteo Benetton; Greg Buchak
Abstract: We study the role of scope in financial intermediation. Using new credit registry data on US firms, we show that in the market for small business lending, multi-product banks benefit from economies of scope across products but exploit their market power to steer firms into more profitable, less regulated products. To quantify these forces and the welfare implications of scope, we develop and estimate an equilibrium model of firm credit provision where banks compete with more specialized non-bank financial intermediaries. In counterfactual simulations, we show that market power and bank steering increase prices and reduce welfare for small firms. These losses, however, are less than the gains from cost synergies. We also simulate equilibrium effects of alternative banking regulations. Our results highlight the need for regulation to recognize the multi-product nature of financial intermediaries.
Keywords: economies of scope; banking; fintech; market power; steering; small business lending
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Multiproduct banks exert market power (G21) | steer firms towards high-markup products (L21) |
| steer firms towards high-markup products (L21) | reduce offerings of lower-margin products (D43) |
| Basel III regulations (G28) | increased costs for small term loans (G21) |
| increased costs for small term loans (G21) | banks shift lending strategies towards credit cards and larger term loans (G21) |
| steering by banks (G21) | negative real outcomes for firms (L21) |
| negative real outcomes for firms (L21) | higher default rates (G33) |
| negative real outcomes for firms (L21) | lower sales growth (L25) |