Competition and Relationship Lending: Friends or Foes?

Abstract

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Lending competition and credit availability for new firms: Empirical study with the price cost margin in regional loan markets

“…We also estimate the specification that includes the interaction term of the Herfindahl index and the share of large banks to examine whether we find the same tendency as the existing empirical finding by Presbitero and Zazzaro (2011) that increased competition in a market with more larger banks, which are presumably less ⁄⁄ Estimated coefficient is statistically significant at the 5% significance level.…”

“…The result shows that PCM is inverse U-shaped, which is consistent with the prediction by Dinç (2000), but none of the coefficients is statistically significant, mainly due to the near multicollinearity of the Herfindahl index and its square. 10 This result is inconsistent with the existing finding that the probability to receive relationship banking is Ushaped against the Herfindahl index in Germany, Belgium, and Italy (Elsas, 2005;Degryse and Ongena, 2007;Presbitero and Zazzaro, 2011).…”

“…Reflecting these mixed predictions, the extant empirical studies provide mixed evidence. For example, Elsas (2005), Degryse and Ongena (2007), and Presbitero and Zazzaro (2011) find that the probability to receive relationship lending is U-shaped against the Herfindahl index. Petersen and Rajan (1995) and Ogura (2010) find that it is increasing in the Herfindahl index, while Memmel et al (2007) find evidence supportive of the positive correlation between competition and relationship lending.…”

The Impact of Local Knowledge on Banking

“…Relationship banking has generated a variety of benefits, including lower interest rates, increased credit availability, and reduced collateral requirements (Berger et al 2001;Cole 1998;Berger and Udell 1995). While competitive pressure may neutralize the advantage of relationship banking because the cost of acquiring proprietary information may not be worthwhile in the face of robust competition, relationship banking could on the other hand ease competitive pressure because banks can differentiate themselves by non-price characteristics, push out other competitors, and charge higher prices (Presbitero and Zazzaro 2011;Elsas 2005;Dell'Aricciaa and Marquez 2004;Boot and Thakor 2000). A meta-analysis of the area finds that strong relationships benefit borrowers, but the lending outcomes differ across the dimensions of the relationships such as time, exclusivity, and cross-product synergies (Kysucky and Norden 2013).…”

Small and Medium Enterprise Financing in Transition Economies

“…However, lenders with greater market power also have greater incentive to acquire expensive borrower information and are more effective at screening borrowers, since they can extract a surplus in the long run. This helps mitigate information asymmetry (Beck et al 2004;Dell'Ariccia and Marquez 2004;Jimenez et al 2009;Presbitero and Zazzaro 2009;Okura 2007).…”