Efficiency in Credit Allocation and the Net Interest Margin

I propose a model in which an entrepreneur has the choice to access either monitored bank financing or un-monitored bond financing. Project type is pri-vate information of the entrepreneur and as a consequence, in the unregulated equilibrium, there is some inefficient over-monitoring by banks when the bank-ing sector is competitive. Bank lending becomes more efficient and the net interest margin falls as bond financing becomes cheaper and the bond market expands. In contrast, if the banking sector is monopolistic, the equilibrium is either efficient or there is inefficient under-monitoring by banks