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

Raquel Fernández, Şule Özler

    Research output: Contribution to journalArticle

    Abstract

    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.

    Original languageEnglish (US)
    Pages (from-to)333-355
    Number of pages23
    JournalInternational Economic Review
    Volume40
    Issue number2
    DOIs
    StatePublished - May 1999

    ASJC Scopus subject areas

    • Economics and Econometrics

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