The effects of credit market competition on the corporate debt mix and the risk of contagion


Project leader


Funding source

Riksbankens Jubileumsfond (RJ)


Project Details

Start date: 01/01/2014
End date: 31/12/2016
Funding: 3535000 SEK


Description

Credit market competition has the potential to lower firms' and individuals' borrowing costs, but may also increase the risk of contagion and thereby financial crises. In this project, we want to further explore the determinants and consequences of such competition. In particular, we want to study: (1) how competition between risk-averse banks and bond investors affects the corporate debt mix of bank loans and bonds, (2) how the efficiency of local bankruptcy procedures influences this mix, and (3) how networks of competing banks, linked through the interbank market, can cause systemic risk even in the absence of defaulting borrowers. Our method consists in building theoretical models of competition between strategic banks and thereafter to test the predictions of these models using international panel data.Credit market competition has the potential to lower firms' and individuals' borrowing costs, but may also increase the risk of contagion and thereby financial crises. In this project, we want to further explore the determinants and consequences of such competition. In particular, we want to study: (1) how competition between risk-averse banks and bond investors affects the corporate debt mix of bank loans and bonds, (2) how the efficiency of local bankruptcy procedures influences this mix, and (3) how networks of competing banks, linked through the interbank market, can cause systemic risk even in the absence of defaulting borrowers. Our method consists in building theoretical models of competition between strategic banks and thereafter to test the predictions of these models using international panel data.Credit market competition has the potential to lower firms' and individuals' borrowing costs, but may also increase the risk of contagion and thereby financial crises. In this project, we want to further explore the determinants and consequences of such competition. In particular, we want to study: (1) how competition between risk-averse banks and bond investors affects the corporate debt mix of bank loans and bonds, (2) how the efficiency of local bankruptcy procedures influences this mix, and (3) how networks of competing banks, linked through the interbank market, can cause systemic risk even in the absence of defaulting borrowers. Our method consists in building theoretical models of competition between strategic banks and thereafter to test the predictions of these models using international panel data.

Last updated on 2017-24-03 at 12:52