The role of banks as producers of information: can it survive competition and cross-selling incentives

Abstract

This paper studies the impact of competition on lending behaviour and cross-selling incentives of banks in a spatial competition model of the banking sector where positively evaluated loan applicants are more likely to buy other services from their lending bank. Overall our model suggests that the more competition increases in the loan market, the more the banking system is encouraged to move towards non-traditional activities and the less credit is information-based. This undesired effect of competition in the loan market may have contributed in the past to the excessive risk-taking behaviour of European banks and could hamper the stability of the financial system in the future