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A Theory of Banks' Industry Expertise, Market Power, and Credit Risk

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Author Info

  • Alex Stomper

    ()
    (Institute for Advanced Studies and Vienna Graduate School of Finance, Stumpergasse 56, 1060 Vienna, Austria)

Abstract

The author analyzes banks' incentives to acquire expertise in judging the creditworthiness of borrowers in an industry with uncertain business conditions. The analysis shows that industry expertise enables banks to extract rents proportional to their exposure to industry-specific credit risk. This exposure is in turn determined by the number of banks aiming to focus on lending to an industry. In equilibrium, the industry receives funding from a limited number of banks with industry expertise, as well as from a competitive fringe of financiers without such expertise. The equilibrium yields testable predictions about the concentration of bank lending to an industry, and about the correlation between this concentration and the recovery rates, default rates, and interest rates of bank loans.

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File URL: http://dx.doi.org/10.1287/mnsc.1060.0559
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Bibliographic Info

Article provided by INFORMS in its journal Management Science.

Volume (Year): 52 (2006)
Issue (Month): 10 (October)
Pages: 1618-1633

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Handle: RePEc:inm:ormnsc:v:52:y:2006:i:10:p:1618-1633

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Related research

Keywords: bank lending; market power; industry expertise; credit risk;

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Cited by:
  1. Hans Degryse & Steven Ongena, 2004. "The Impact of Competition on Bank Orientation and Specialization (new titel: The impact of competition on bank orientation)," CESifo Working Paper Series 1119, CESifo Group Munich.
  2. Jiawei Chen, 2006. "Two-Sided Matching and Spread Determinants in the Loan Market," Working Papers 060702, University of California-Irvine, Department of Economics.
  3. Dickler, Robert A. & Schalast, Christoph, 2006. "Distressed debt in Germany: What's next? Possible innovative exit strategies," Frankfurt School - Working Paper Series 73, Frankfurt School of Finance and Management.
  4. Adam Gersl & Petr Jakubik & Dorota Kowalczyk & Steven Ongena & Jose-Luis Peydro Alcalde, 2012. "Monetary Conditions and Banks' Behaviour in the Czech Republic," Working Papers 2012/02, Czech National Bank, Research Department.

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