Major bank mergers in the last few years have highlighted the debate about the effect of bank concentration. This debate has been extensively studied in the finance literature without conclusive results. While some studies find that bank concentration reduces access to credit, deters economic growth, and increases unemployment, others find that bank concentration increases access to credit, and can foster economic growth. The objective of the study is to measure the effect of bank competition at the bank branch level on access to credit, repayment behavior, and interest rate.
A potential explanation for the conflicting evidence is that the measure of bank concentration is usually estimated at the country level, which might not reflect the real competition in the industry. A second problem is that concentration is usually taken as an independent variable; however it is evident that bank concentration depends of the demand for credit. Based on the spread and concentration of banks within a country, it can be difficult to tell if a difference in interest rate is explained by the market structure or by the demand for credit.
This study addresses both problems. It uses a measure of concentration at the local level, which allows for a more precise measure of concentration. It also focuses on the opening of new branches instead of new banks, which can generate changes in competition that are not necessarily associated with changes in demand. The study will exploit variation in bank concentration at the municipality level generated by the opening of new bank branches to identify the effect of competition.