Elusive competition: impact of non-bank credit providers’ financing on credit market competition

This study examines the complexities of augmenting credit market competition through the introduction of newly established non-depository non-bank credit providers reliant on bank financing. We introduce an innovative model that elucidates market dynamics and frictions, highlighting the potential for increased interest rates. The study underscores the pivotal role of borrowers’ insolvency probabilities in this scenario, positing that the proliferation of credit providers might elevate average credit prices. The findings advocate for equitable conditions for new entrants to avoid inadvertently inflating interest rates while fostering competition, offering insights for policy frameworks promoting market access and reduced credit costs.