Debt Concentration and Bargaining Power: Large banks, Small Banks, and Secondary Market Prices

Commercial bank debts of developing countries are held by large international banks and smaller domestic banks. This paper investigates how debt concentration - the proportion of a country's debt held by large banks relative to small banks - affects the secondary market price for these loans. We find that countries with higher concentrations have higher secondary-market prices. We explain this empirical finding in a bargaining model that endogenizes the maximum penalty that banks can credibly impose on a recalcitrant debtor. We show that the banks' bargaining power increases with the degree of debt concentration, thus increasing repayment and secondary-market prices.