Bank Competition and Bargaining over Refinancing

We model mortgage refinancing as a bargaining game involving the borrowing household, the incumbent lender, and an outside bank. In equilibrium, the borrower's ability to refinance depends on the search costs in the local banking market, her cost of switching to another bank, and the average quality of the borrower pool. We find empirical support for the key predictions of our model in an administrative data set covering the universe of mortgages in Belgium. In particular, households' refinancing propensities are positively correlated with the number of local bank branches and negatively correlated with local mortgage market concentration.