DP1655 | Debt Concentration and Bargaining Power: Large Banks, Small Banks, and Secondary Prices

Publication Date

27/06/1997

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Abstract

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).