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: www.cepr.org/pubs/dps/DP1655.asp

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).