Working Paper: CEPR ID: DP6412
Authors: Hans Degryse; Luc Laeven; Steven Ongena
Abstract: Recent theoretical models argue that a bank?s organizational structure reflects its lending technology. A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information. We investigate theoretically and empirically how bank organization shapes banking competition. Our theoretical model illustrates how a lending bank?s geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the lending and rival banks? organization on the geographical reach and loan pricing of a singular, large bank in Belgium. We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower. We find that the organizational structures of both the rival banks and the lending bank matter for branch reach and loan pricing. The geographical footprint of the lending bank is smaller when rival banks are large and hierarchically organized. Such rival banks may rely more on hard information. Geographical reach increases when rival banks have inferior communication technology, have a wider span of organization, and are further removed from a decision unit with lending authority. Rival banks? size and the number of layers to a decision unit also soften spatial pricing. We conclude that the organizational structure and technology of rival banks in the vicinity influence local banking competition.
Keywords: authority; banking sector; competition; hierarchies; technology
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 |
|---|---|
| Size and hierarchical organization of rival banks (G21) | Geographical reach of lending bank (G21) |
| Inferior communication technology of rival banks (L96) | Geographical reach of lending bank (G21) |
| Wider span of organization of rival banks (G21) | Geographical reach of lending bank (G21) |
| Distance from decision unit with lending authority of rival banks (G21) | Geographical reach of lending bank (G21) |
| Size of rival banks and number of decision layers (G21) | Spatial pricing (D49) |