The Impact of Organizational Structure and Lending Technology on Banking Competition

Recent theoretical models argue that a bank's organizational structure reflects its lending technology.A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information.We investigate theoretically and empirically how bank organization shapes banking competition.Our theoretical model illustrates how a bank's geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the rival banks' organization on the geographical reach and loan pricing of a singular, large bank in Belgium.We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower.We find that the organizational structure of the close rival banks matters for both branch reach and loan pricing.The geographical footprint of the lending bank is smaller when the close rival banks are large, hierarchically organized, and technologically advanced. Such rival banks may rely more on hard information.Large rival banks in the vicinity also lower the degree of spatial pricing.We also find that the effects on spatial pricing are more pronounced for firms that generate less hard information, such as small firms.In short, size and hierarchy of rival banks in the vicinity influences both branch reach and loan pricing of the lender.banking sector;bank size;competition;mode of organization

Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market

This paper links the current subprime mortgage crisis to a decline in lending standards associated with the rapid expansion and changes in the structure of this market. We show that lending standards declined more in areas that experienced faster credit growth. We also find that the entry of new lenders contributed to the decline in lending standards. The results are robust to controlling for house price appreciation, mortgage securitization, and other economic fundamentals, and to several robustness tests controlling for endogeneity. The results are consistent with the predictions of recent models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.credit boom;lending standards;mortgages;subprime loans;moral hazard;financial accelerators

The Impact of Organizational Structure and Lending Technology on Banking Competition

Recent theoretical models argue that a bank’s organizational structure reflects its lending technology. A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information. We investigate theoretically and empirically how bank organization shapes banking competition. Our theoretical model illustrates how a lending bank’s geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the lending and rival banks’ organization on the geographical reach and loan pricing of a singular, large bank in Belgium. We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower. We find that the organizational structures of both the rival banks and the lending bank matter for branch reach and loan pricing. The geographical footprint of the lending bank is smaller when rival banks are large and hierarchically organized. Such rival banks may rely more on hard information. Geographical reach increases when rival banks have inferior communication technology, have a wider span of organization, and are further removed from a decision unit with lending authority. Rival banks’ size and the number of layers to a decision unit also soften spatial pricing. We conclude that the organizational structure and technology of rival banks in the vicinity influence local banking competition.banking sector;competition;hierarchies;authority;technology

Who Invests in Home Equity to Exempt Wealth from Bankruptcy?

Homestead exemptions to personal bankruptcy allow households to retain their home equity up to a limit determined at the state level. Households that may experience bankruptcy thus have an incentive to bias their portfolios towards home equity. Using US household data from the Survey of Income and Program Participation for the period 1996-2006, we find that especially households with low net worth maintain a larger share of their wealth as home equity if a larger homestead exemption applies. This home equity bias is also more pronounced if the household head is in poor health, increasing the chance of bankruptcy on account of unpaid medical bills. The bias is further stronger for households with mortgage finance, shorter house tenures, and younger household heads, which taken together reflect households that face more financial uncertainty.Homestead exemptions;Personal bankruptcy;Portfolio allocation;Home ownership

Confidence building in emerging stock markets

Investor confidence in reliable property rights and stable, market-oriented policies are a necessary condition for financial integration and the development of emerging stock markets. Announced market-oriented policies may be reversed, however, and are initially not fully credible. We argue that sustained privatization and liberalization programmes represent a major test of political commitment to safer private property rights. We investigate whether successful privatization has a significant effect on emerging stock market development through the resolution of policy risk, i.e. the risk of ex post policy changes with redistributive impact on investment returns. The evidence from our panel study suggests that progress in privatization gradually leads to increased confidence. Moreover, increased confidence has a strong effect on local market development and is a significant determinant of excess returns. We conclude that financial liberalization and the resolution of policy risk resulting from successful privatization has been an important source for the broadening and deepening of emerging stock markets

Finance, firm size and growth.

[Dataset available: http://hdl.handle.net/10411/15986]