We model the impact of bank mergers on loan competition, reserve holdings,
and aggregate liquidity. A merger changes the distribution of liquidity
shocks and creates an internal money market, leading to financial cost efficiencies
and more precise estimates of liquidity needs. The merged banks
may increase their reserve holdings through an internalization effect or decrease
them because of a diversification effect. The merger also affects loan
market competition, which in turn modifies the distribution of bank sizes
and aggregate liquidity needs.
In a competitive world of symmetric information
and costless enforcement, credit contracts
could be written conditional on borrower behavior.
Borrowers would then have access
to loans under any interest rate-collateral
combination that would yield lenders a zero
expected profit. However, as a large literature
has shown, information asymmetries
and enforcement costs make such conditional
contracting infeasible and restrict the set of
available contracts, eliminating as incentive incompatible
high interest rate, low collateral
Consumer financing have become increasingly important in the private sector of Pakistan for the last two decades. With the new reforms in the banking sector, the marketing of financial products has become very competitive, creating a needfor strategizing the marketing efforts. This study investigates the shift of Pakistani consumers towards the use of plastic money, with emphasis on credit cards. A survey of consumers holding (at least) one or no credit card were used for data collection.
This category features the broadest application of the use of credit ratings. Member
authorities from every jurisdiction submitting responses indicated that their LRSPs contained
provisions using credit ratings for the purpose of determining net or regulatory capital, and
more LRSPs are applied to capital requirements than to any other category of use. Credit
ratings were generally used in those LRSPs as a means of mapping credit risks to capital
charges or risk weights.
A common argument in favor of usury laws is that without them, borrowers would be
forced to pay exorbitant interest rates, or at least rates that are unreasonable in relation to
the cost of supplying credit.
According to economic theory, a competitive market is sufficient to prevent lenders from
exercising power over pricing or earning more than a normal return. The price established
in a competitive market reflects suppliers' costs of providing the given amount of that good.
To be sure, removing a binding usury ceiling will result in higher interest rates.
The model describes the behaviour of consumers, which are heterogeneous in terms
of age, income and ¯nancial assets. They maximize the utility from consumption sub-
ject to the life-cycle budget constraint. Their savings are remunerated at the deposit
interest rate and the cost of borrowing is given by the lending rate. When young, con-
sumers work and receive wages that depend on an idiosyncratic, stochastic component
and a deterministic life-cycle pro¯le of productivity. When old, they are on a manda-
tory retirement and receive pensions.
The properties of nonsophisticated borrowers’ competitive-equilibrium contracts, and the
restriction disallowing disproportionately large penalties for deferring small amounts of repayment,
have close parallels in real-life credit markets and their regulation. As has been noted by
researchers, the baseline repayment terms in credit-card and subprime mortgage contracts are
typically quite strict, and there are large penalties for deviating from these terms.
Due to the nonredundancy
condition, the competitive-equilibrium contracts we derive exclude most options by assumption;
in particular, nonsophisticated borrowers’ only option to change the repayment schedule will be
to change it by a lot for a large fee. As is usually the case in models of nonlinear pricing, the same
outcomes can also be implemented by allowing other choices, but making them so expensive that
the borrower does not want to choose them.
Critical features of a sound investment
climate include a sensible governance system that allows firms and farms to pursue
productive activity without harassment, contracts and property rights to be respected and
corruption to be reduced. Equally important is an infrastructure that allows private
entrepreneurs and their employees to operate effectively. Competition and, where
necessary, regulation are essential to channel private initiative in socially useful
Some of the responsibility for ensuring a competitive marketplace must be placed on
borrowers themselves, since knowledgeable, informed borrowers help to foster competition
in credit markets. When consumers do not know or cannot compare rates being charged by
various lenders, each lender has more freedom to charge any rate — fair or unfair. A high
level of borrower awareness can create a natural protection from unreasonable interest rates,
in lieu of the external constraint of a usury ceiling.
By standard indicators of competitiveness, the subprime loan origination market seems quite competitive: no participant
has more than 13 percent market share (Bar-Gill 2008). By similar indicators, the credit-card market is even more
competitive. For the subprime mortgage market, however, observers have argued that because borrowers find contract
terms confusing, they do not do much comparison shopping, so the market is de facto not very competitive.
While the effects of relaxing exclusivity warrant further research, in general it would not eliminate our main points
regarding nonsophisticated borrowers. Even if borrowers had access to a competitive market in period 1, our results
remain unchanged so long as the original firm can include in the contract a fee—such as the prepayment penalties in
subprime mortgages—for refinancing with any firm in the market. If firms cannot postulate such a fee for refinancing on
the competitive market, then in our three-period setting a borrower will always avoid repaying more than expected.
Several particularmodels have been constructed to develop the new perspective.We are
still nowhere near to having an overarching model, of the kind economists are used to in the
theory of general competitive equilibrium.
Some models have as their ingredients large
inequalities in land ownership in poor countries and the non-convexities that prevail at the level
of the individual person in transforming nutrition intake into nutritional status and, thereby,
labour productivity (Dasgupta and Ray, 1986, 1987; Dasgupta, 1993, 1997b).
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In the fall of 2003, the IFC prepared a market survey on the demand for fixed assets
(published April 2004). The response to their survey showed that this demand was at $383
million. Furthermore, businesses were asked to rate a list of impediments or obstacles to
their business development. In order they were: unfavorable business climate, unfair
competition, high taxes, and lack of credit/investment. Although the change in government
has resulted in some positive changes in the first three areas, the “lack of credit/investment”
is not currently being addressed.
Nonprofit corporations have borrowed money using tax-exempt bonds for many years.
Recently, however, the tax-exempt bond market has experienced a substantial
expansion in the types of nonprofits using such financing. Previously dominated by
hospitals and universities, now virtually every type of eligible nonprofit corporation is
borrowing on a tax-exempt basis, spurred by increasing demand for facilities, sector
competition, better understanding of the benefits of tax-exempt financing and
greater market acceptance of nonprofit corporation credits.