Debt concentration and bargaining power: large banks, small banks, and secondary market prices

Abstract

Commerical bank debts of developing countries are held by large international banks and smaller domestic banks. This paper investigates how debt concentration-the proportion of a country's debt held by large banks relative to small banks-affects the secondary market price for the se loans. We find that countries with higher concentrations have higher secondary-market prices. We explain this empirical finding in a bargaining model that endogenizes the maximum penalty that banks can credibly impose on a recalcitrant debtor. We show that the banks' bargaining power increases with the degree of debt concentration, thus increasing repayment and secondary-market prices.