Working Paper: CEPR ID: DP2936
Authors: Jan Bouckaert; Hans Degryse
Abstract: The Riegle-Neal Act in the US and the Economic and Monetary Union in Europe are recent initiatives to stimulate financial integration. These initiatives allow new entrants to ?poach? the incumbents' clients by offering them attractive loan offers. We show that these deregulations may be insufficient since asymmetric information seriously hampers the integration of credit markets. This asymmetry stems from the informational advantage incumbent banks have about their current clients vis-a-vis potential entrants. Moreover, banks may strategically display some information, hindering entry when asymmetric information is moderate. We also show that voluntary information sharing emerges only when asymmetric information is low.
Keywords: asymmetric information; banking competition; barriers to entry; financial integration
JEL Codes: D43; G21; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| asymmetric information (D82) | credit market integration (F30) |
| information sharing (O36) | market entry (L17) |
| information display (Y10) | borrower switching (G51) |
| information display (Y10) | competition dynamics (L13) |
| lack of information display (D83) | monopoly position (D42) |
| strategic information display (L86) | mitigate adverse selection (D82) |
| proportion of low-ability borrowers (G21) | market entry dynamics (F23) |
| information sharing (O36) | welfare maximization with switching costs (D69) |