Bank competition and credit markets in transition economies

In transition economies, banks do not yet play a crucial role in financing investment. We explain the low degree of bank intermediation by investigating credit offers by monopolistic, oligopolistic, and competitive banks with a particular focus on collateral. The more market power that banks have the more collateral they demand, because collateral is used not only to solve the moral hazard problem but also to extract rents. We find that asymmetric information about the firm's assets and, hence, possible collateral, leads to credit rationing. Empirical evidence from Romania and Estonia confirms the results of our theoretical model. (C) 2003 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.