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Differentiated attributes and service-quality competition as sources of portfolio interdependence and diverging scales in banking

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  • Dia, Enzo
  • VanHoose, David

Abstract

Why are banks’ asset–liability decisions interdependent, and why do we observe both large and small banks? We introduce convex costs in a model with both horizontal and vertical quality differentiation, finding that, as long as a single bank spends on quality attributes, strategic quality rivalry causes the portfolio decisions of all banks to be interconnected, generating portfolio interdependence regarding choices among assets and liabilities at each bank, including banks that forego vertical quality provision. In addition, diseconomies of scale allow banks to remain profitable at different scales of operations.

Suggested Citation

  • Dia, Enzo & VanHoose, David, 2022. "Differentiated attributes and service-quality competition as sources of portfolio interdependence and diverging scales in banking," Economics Letters, Elsevier, vol. 219(C).
    • Handle: RePEc:eee:ecolet:v:219:y:2022:i:c:s016517652200307x
    DOI: 10.1016/j.econlet.2022.110823
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    References listed on IDEAS

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    More about this item

    Keywords

    Market power; Loan pricing; Portfolio interdependence; Vertical differentiation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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