Open Banking under Maturity Transformation

Abstract

Open banking is a policy initiative that encourages lending market competition by allowing borrowers to freely share data with any financial institutions. We investigate resource allocation efficiency under open banking. In our setting, banks compete in common-value auctions where they obtain more precise private signals about a common shock to borrowers if more borrowers share data with them. Maturity transformation leads to feedback loop between bank financial cost and bank investment, resulting in informational monopoly under closed banking and positive bank nonparticipation probability under open banking. Adopting open banking may lead to inefficient resource allocation, although it improves borrower welfare.

Keywords: Open banking, borrower data, lending market competition, maturity transformation, informational monopoly, winner's curse, economic efficiency

JEL Classification: D42, D44, G21, G23