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Exclusion, competition, and regulation in the retail loan market

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  • Melnik, Arie
  • Shy, Oz

Abstract

Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.

Suggested Citation

  • Melnik, Arie & Shy, Oz, 2015. "Exclusion, competition, and regulation in the retail loan market," Journal of Banking & Finance, Elsevier, vol. 52(C), pages 189-198.
    • Handle: RePEc:eee:jbfina:v:52:y:2015:i:c:p:189-198
    DOI: 10.1016/j.jbankfin.2014.08.019
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit quality; Interest rate regulation; Lending; Exclusion of borrowers;
    All these keywords.

    JEL classification:

    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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