We want to emphasize that the riskreducing
effect of bank-level pricing power is neither driven by an efficiency story, nor
by a business model or risk-level story. First, we intentionally computed a Lerner Index
which takes into account that banks often operate using less-than-optimal production
technology. The Lerner Index is, therefore, not biased by any inefficiencies at the bank
level. Second, our set of exogenous variables controls sufficiently well for heterogeneity
across banks arising from differences in the degree of specialization of banks. To make
this point concrete, if the degree of specialization (or generally the business model) is not
properly accounted for, it is possible that the Lerner Index will capture variation in the
degree of specialization between banks. Banks specializing in providing loans to a certain
group of borrowers might be able to set loan rates at a markup which would result in a
higher Lerner Index. The variable sectoral concentration of credit portfolio controls for
this channel.