More banks mean higher costs for borrowers
When banks crowd a lending market, you can forget the traditional relationship of supply and demand, in which increased supply normally leads to lower prices. So finds new research from Cesare Fracassi, associate professor of finance at Texas McCombs.
Paradoxically, a larger number of banks in a market sends the price of a loan up — as measured by the interest rate charged by the lender. For every six additional banks in a county, he finds, interest rates are 7 basis points higher. A basis point is one-hundredth of 1%.
“The usual story we tell says the more suppliers of a product are out there, the better it is,” Fracassi says. “It’s ...