https://macropaperwarehouse.com/authors/chun-che-chi/Chun-Che ChiHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/lender-concentration-of-external-debts-and-sudden-stops/https://macropaperwarehouse.com/papers/lender-concentration-of-external-debts-and-sudden-stops/<h2 id="research-question">Research Question</h2> <p>This paper studies how the lender structure of external debt — specifically, the degree to which a borrowing country&rsquo;s external debt is concentrated among a small number of large lenders — affects open economies&rsquo; credit conditions, borrowing behavior, and the severity of sudden stops.</p> <h2 id="core-mechanism">Core Mechanism</h2> <p>The paper argues that the pecuniary externality arising from collateral foreclosure can be internalized not only by borrowers (as in the standard Bianchi 2011 framework) but also by lenders. When a large lender holds a substantial share of total loans, it has an incentive to foreclose only partially on seized collateral. Selling foreclosed collateral injects asset supply and depresses the collateral price; a sufficiently large lender internalizes this price impact and therefore restrains foreclosure. Atomistic lenders, by contrast, take the collateral price as given and sell all seized collateral (foreclosure rate = 1). Consequently, concentrating external debt in fewer, larger lenders supports a higher collateral price during financial downturns. This higher collateral price raises borrowing capacity, weakens borrowers&rsquo; precautionary saving motive, and causes them to overborrow relative to the social optimum.</p>