Working Paper: CEPR ID: DP4543
Authors: Hans Degryse; Steven Ongena
Abstract: How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking - and bank industry specialization. We empirically investigate the impact of interbank competition on bank branch orientation and specialization. We employ a unique dataset containing detailed information on bank-firm relationships and industry classification. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending and specialize somewhat less in a particular industry. Our results illustrate that competition and relationships are not necessarily inimical.
Keywords: bank industry specialization; bank orientation; competition; lending relationships
JEL Codes: G21; L11; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased local competition (L19) | greater likelihood of banks engaging in relationship-based lending (G21) |
| larger bank branches (G21) | more likely to engage in transactional lending (G21) |
| proximity to the bank branch (G21) | increases likelihood of relationship borrowing (G51) |