Informational Barriers to Entry into Credit Markets*

Abstract

Economic theory suggests that asymmetric information between incumbents and entrants can generate barriers to entry into credit markets. Incumbents have superior information about their own customers and the overall economic conditions of the local credit market. This implies that entrants are likely to experience higher loan default rates than the incumbents. We test these theoretical predictions using a unique database of 7,275 observations on 729 individual banks' lending in 95 Italian local markets. We find that informational asymmetries play a significant role in explaining entrants' loan default rates. The default rate is significantly higher for those banks that entered local markets without opening a branch, suggesting that having a branch on site may help to reduce the informational disadvantage. We also uncover a positive correlation between banks' loan default rates in individual local markets and the number of banks lending in that market. We argue that these informational barriers can help to explain why entry into many local credit markets by domestic and foreign banks was slow, even after substantial deregulation.

Asymmetric Information and Imperfect Competition in Lending Markets

“…We recover this synthetic price using regression analysis based on the actual prices that we observe. 51 We need to do this to predict the price that would have been offered to firms not borrowing in the data, as well as the price 50 There is evidence in other papers (Bofondi and Gobbi (2006)), as well as in our data, that a few banks lend in some provinces even if they don't have a branch there. 51 For alternative ways of predicting prices see Gerakos and Syverson (2014).…”

“…We do this to concentrate on new borrowers, where we expect to find stronger asymmetric information, and because modeling the evolution of the borrowerlender relationship is beyond the scope of this paper. 31 Following other papers on Italian local credit markets, like Felici and Pagnini (2008), Bofondi and Gobbi (2006), and Gobbi and Lotti (2004), we identify banking markets as the Italian provinces, also used by Italian supervisory authorities as proxies for the local markets for deposits. 32 Our markets are then constructed as province-year combinations.…”

“…Nonetheless, several reduced form papers on Italian banking provide motivation for a model that structurally combines these two effects. For example, Bofondi and Gobbi (2006) show that new banks entering local markets experience higher default rates than incumbents, as the latter have superior information about borrowers and local economic conditions. Gobbi and Lotti (2004) claim that there is a positive correlation between branching and markets with low proprietary information services, and that interest rate spreads are positively related to entry of de novo banks, but not of banks existing in other markets.…”

Does business regulation matter for banks in the European Union?

“…Along these lines, Houston et al (2010) find that increased credit information sharing at the country-level increases bank profitability, lowers bank risk but also decreases the likelihood of financial crisis and increases economic growth. Furthermore, credit information sharing improvements may contribute to the reduction of the significant informational disadvantages foreign and new entrant banks have in a market (Bofondi and Gobbi, 2006;Gianneti and Ongena, 2009), improving in that way their performance.…”

Information Sharing and Cross-Border Entry in European Banking

“…Bofondi and Gobbi (2006) discuss the interaction of informational barriers and market entry for 95 local Italian markets. Informational disadvantages contribute significantly to the entrants' higher share of defaulting loans.…”