Endogenous Product Differentiation in Credit Markets: What Do Borrowers Pay for?

23 Pages Posted: 27 Feb 2002

See all articles by Moshe Kim

Moshe Kim

University of Haifa - Department of Economics

Eirik Gaard Kristiansen

NHH Norwegian School of Economics; Norwegian School of Economics (NHH) - Department of Economics

Bent Vale

Norges Bank (Central bank of Norway)

Multiple version iconThere are 2 versions of this paper

Date Written: December 10, 2001

Abstract

This paper studies strategies pursued by banks in order to differentiate their services from those of their rivals. In that way competition among banks is softened. More specifically we analyze if the bank size, the bank's ability to avoid losses, and its capital ratio can be used as strategic variables to make banks different and increase the interest rates banks can charge their borrowers in equilibrium. Using a panel of data covering Norwegian banks between 1993 and 1998 we find empirical support that the ability to avoid losses, measured by the ratio of loss provisions, may act as such a strategic variable. Our main finding is that borrowers in the market for credit line loans may discipline banks to avoid losses. We also find evidence that banks pass on parts of increases in their operating costs to credit line borrowers. However, we do not find evidence for the use of high capital ratio as a strategic variable that borrowers are willing to pay for.

JEL Classification: G21, L15

Suggested Citation

Kim, Moshe and Kristiansen, Eirik Gaard and Vale, Bent, Endogenous Product Differentiation in Credit Markets: What Do Borrowers Pay for? (December 10, 2001). Available at SSRN: https://ssrn.com/abstract=301539 or http://dx.doi.org/10.2139/ssrn.301539

Moshe Kim

University of Haifa - Department of Economics ( email )

Haifa 31905
Israel
(972) 4 8240115 (Phone)
(972)4-8240059 (Fax)

Eirik Gaard Kristiansen

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway
+47 55 95 92 78 (Phone)
+47 55 95 95 43 (Fax)

Norwegian School of Economics (NHH) - Department of Economics

Helleveien 30
N-5035 Bergen
Norway

Bent Vale (Contact Author)

Norges Bank (Central bank of Norway) ( email )

Bankplassen 2
P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 66 74 (Phone)
+47 22 42 40 62 (Fax)

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