DP17497 Wide or Narrow? Competition and Scope in Financial Intermediation

Author(s): Matteo Benetton, Greg Buchak, Claudia Robles-Garcia
Publication Date: July 2022
Keyword(s): Banking, Economies of scope, Fintech, market power, Small business lending, steering
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17497

We study the role of scope in financial intermediation. Using new credit registry data on US firms, we show that in the market for small business lending, multi-product banks benefit from economies of scope across products but exploit their market power to steer firms into more profitable, less regulated products. To quantify these forces and the welfare implications of scope, we develop and estimate an equilibrium model of firm credit provision where banks compete with more specialized non-bank financial intermediaries. In counterfactual simulations, we show that market power and bank steering increase prices and reduce welfare for small firms. These losses, however, are less than the gains from cost synergies. We also simulate equilibrium effects of alternative banking regulations. Our results highlight the need for regulation to recognize the multi-product nature of financial intermediaries.