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This paper analyzes banks' choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication. JEL classification: D82; G21; G32 Keywords: individual-bank lending, multiple-bank lending, monitoring, diversification, free-riding problem Recent empirical findings (e.g., Ongena and Smith, 2000a;Ongena and Smith, 2000b) suggest a widespread use of multiple-bank lending. In almost all countries even relatively small firms borrow from several banks at the same time. The distribution * We thank Franklin Allen, Steven Ongena and Rafael Repullo for comments and suggestions, and seminar participants at the Sveriges Riksbank, Norges Bank, University of Salerno, Università Cattolica in Milan, and European Economic Association Meetings in Stockholm. We also appreciated the excellent research assistance by Diego Fantini. Financial support from MURST ex-60% 2001 is gratefully acknowledged. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank. We are responsible for all remaining errors.

This paper analyzes banks' choice between lending to firms individually and sharing lending with other banks, when firms and banks are subject to moral hazard and monitoring is essential. Multiple-bank lending is optimal whenever the benefit of greater diversification in terms of higher monitoring dominates the costs of free-riding and duplication of efforts. The model predicts a greater use of multiple-bank lending when banks are small relative to investment projects, firms are less profitable, and poor financial integration, regulation and inefficient judicial systems increase monitoring costs. These results are consistent with empirical observations concerning small business lending and loan syndication. JEL classification: D82; G21; G32 Keywords: individual-bank lending, multiple-bank lending, monitoring, diversification, free-riding problem Recent empirical findings (e.g., Ongena and Smith, 2000a;Ongena and Smith, 2000b) suggest a widespread use of multiple-bank lending. In almost all countries even relatively small firms borrow from several banks at the same time. The distribution * We thank Franklin Allen, Steven Ongena and Rafael Repullo for comments and suggestions, and seminar participants at the Sveriges Riksbank, Norges Bank, University of Salerno, Università Cattolica in Milan, and European Economic Association Meetings in Stockholm. We also appreciated the excellent research assistance by Diego Fantini. Financial support from MURST ex-60% 2001 is gratefully acknowledged. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank. We are responsible for all remaining errors.

In this study branching costs and competitiveness of European banks are measured by fitting a monopolistic competition model to a representative sample drawn from nine EEC banking industries in the period from 1990 to 1996. In the theoretical model, banks decide strategically the size of their branching network anticipating the degree of competition faced on interest rates. From the structural equations of the model an econometric test is derived in order to measure branching costs and degree of competition in banking services. The empirical analysis captures their changing over time together with the impact of various European directives aiming at deregulating the banking industry. Furthermore the study shows persistence of segmentation acoss EEC banking industries.

This paper analyzes the relation between CEOs monetary incentives, financial regulation and risk in banks. We present a model where banks lend to opaque entrepreneurial projects to be monitored by managers; managers are remunerated according to a pay-for-performance scheme and their effort is unobservable to depositors and shareholders. Within a prudential regulatory framework that defines a capital requirement and a deposit insurance, we study the effect of increasing the variable component of managerial compensation on risk taking. We then test empirically how monetary incentives provided to CEOs in 2006 affected banks' stock price and volatility during the 2007-2008 financial crisis on a sample of large banks around the World. The cross-country dimension of our sample allows us to study the interaction between CEO incentives and financial regulation. The empirical analysis suggests that the sensitivity of CEOs equity portfolios to stock prices and volatility has been indeed related to worse performance in countries with explicit deposit insurance and weaker monitoring by shareholders. This evidence is coherent with the main prediction of the model, that is, the variable part of the managerial compensation, combined with weak insiders' monitoring, exacerbates the risk-shifting attitude by managers.