Recently, some non-banks caused disgraceful affairs in the consumer loan
market. These affairs result in the assertion that the government should
regulate the non-bank. There are two ways that the government can use to
regulate these non-banks in the consumer loan market. One is called the
direct regulation. For example, the government fixes the maximum interest
rate of loan that the non-banks can set. The other example is that the
government establishes a public financial institution and partially controls
the interest rate through its activity in the market, that is, the indirect
regulation. We are especially interested in the latter and investigate
the effect of introducing a public financial institution in the consumer
loan market on the social welfare. To this end, we analyze the situation
that the market consists of two kind of financial institutions, that is,
private non-banks and a public financial institution. We assume that these
financial institutions must borrow the necessary funds from the only financial
firm and have the identical cost function. While private non-banks maximize
their profit given the volume of the loan that the others supply to consumers,
a public financial institution decides its lending volume so as to maximize
the social surplus.
We construct the following two-stage game: At the first stage, the monopolistic
financial firm offers the interest rate at which it asks for supplying
fund to both financial institutions. Then the non-banks and a public financial
institution simultaneously decide their lending volume at the second stage.
We compare the equilibrium with that of benchmark case where only private
non-banks operate in the market.
We establish the following results when the market consists of both private non-banks and a public financial institution. The interest rate at which they raise the fund is higher than when the market consists of only private non-banks. The interest rate of loan to consumers is lower and total volume of loan is larger than in the benchmark case. When there are more than 5 non-banks in the market in the long-run equilibrium, the social surplus increases if an additional non-bank enters the market.
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