Citation:

Abstract:

In this chapter we modify the Broecker (1990) model of interbank competition with
costless testing by introducing credit bureau services. Unlike Broecker, we show
that there exists a symmetrical pure strategy Nash equilibrium in which all banks
fully use the credit bureau services. We show that this pure strategy equilibrium
can be interpreted as a competition softening (tacit collusion) outcome because
credit bureaus allow banks to coordinate on loan rates independent on marginal
costs. Compared to the existing models, our results are not based on the existence
of informational rents and thus they hold even under transactional banking. The
higher is the number of banks the less likely is the competition softening outcome
(the conditions for the competition softening equilibrium are less likely to be sat-
is¯ed) and thus there exists the optimal number of banks in the market under the
conditions of free entry.