The Impact of Competition on Bank Orientation and Specialization

How do banks react to increased interbank competition?Recent banking theory offers conflicting predictions about the impact of competition on bank orientation í L H WKH choice of relationship based versus transactional banking í DQG EDQN LQGXVWU\ specialization.We empirically investigate the impact of interbank competition on bank branch orientation and specialization.We employ a unique data set containing detailed information on bank-firm relationships and industry classification.We find that bank branches facing stiff local competition engage relatively more in relationship-based lending but specialize somewhat less in a particular industry.Our results illustrate that competition and relationships are not necessarily inimical.competition;banks;bank lending

The Impact of Competition on Bank Orientation

How do banks react to increased competition?Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking.We empirically investigate the impact of interbank competition on bank branch orientation.We employ a unique data set containing detailed information on bank-firm relationships.We find that bank branches facing stiff local competition engage considerably more in relationship-based lending.Our results illustrate that competition and relationships are not necessarily inimical.bank orientation;bank industry specialization;competition;lending relationships

Distance, Lending Relationships and Competition

A recent string of theoretical papers highlights the importance of geographical distance in explaining pricing and availability of loans to small firms.Lenders located in the vicinity of small firms have significantly lower monitoring and transaction costs, and hence considerable market power if competing financiers are located relatively far.We directly study the effect on loan conditions of the geographical distance between firms, the lending bank, and all other banks in the vicinity.For our study, we employ detailed contract information from more than 15,000 bank loans to small firms and control for relevant relationship, loan contract, bank branch, firm, and regional characteristics.We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending.Loan rates decrease in the distance between the firm and the lending bank and increase similarly in the distance between the firm and competing banks.Both effects are statistically significant and economically relevant, are robust to changes in model specifications and variable definitions, and are seemingly not driven by the modest changes over time in lending technology we infer.pricing;bank lending;price discrimination

Distance, lending relationships and competition.

Competition;

Rules versus discretion in loan rate setting.

Market; Order; Rules;