DP1655 Debt Concentration and Bargaining Power: Large Banks, Small Banks, and Secondary Prices
| Author(s): | Raquel Fernández, Sule Ozler |
| Publication Date: | June 1997 |
| Keyword(s): | Bargaining Power, Secondary Market Prices, Sovereign Debt |
| JEL(s): | C78, F34 |
| Programme Areas: | International Macroeconomics |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=1655 |
Commercial bank debts of developing countries are held by a heterogenous group of banks. Here we focus on the distinction between large international money-centre banks and smaller domestic banks. In particular we investigate the role of debt concentration ? the amount of a country?s debt held by large banks relative to small banks ? on the secondary market price for these loans. Our empirical investigation indicates that concentration is an important determinant of secondary market discounts: higher concentration decreases the discount. An explanation for this finding is provided in the context of a bargaining model that endogenizes the level of the maximum penalty that banks can credibly threaten to impose on a recalcitrant debtor. We show that the banks? bargaining power increases with the degree of debt concentration, which in turn increases repayment and secondary market prices (and hence lowers discounts).