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Informational Barriers to Entry into Credit Markets

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  • Marcello Bofondi
  • Giorgio Gobbi

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. Copyright 2006, Oxford University Press.

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File URL: http://hdl.handle.net/10.1007/s10679-006-6978-2
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Bibliographic Info

Article provided by European Finance Association in its journal Review of Finance.

Volume (Year): 10 (2006)
Issue (Month): 1 ()
Pages: 39-67

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Handle: RePEc:oup:revfin:v:10:y:2006:i:1:p:39-67

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Cited by:
  1. Luigi Guiso & Luigi Pistaferri & Fabiano Schivardi, 2010. "Credit within the Firm," Economics Working Papers ECO2010/16, European University Institute.
  2. Giannetti, Caterina & Jentzsch, Nicola & Spagnolo, Giancarlo, 2010. "Information Sharing and Cross-Border Entry in European Banking," ECRI Papers 2990, Centre for European Policy Studies.
  3. Florian Heider & Roman Inderst, 2012. "Loan prospecting," Working Paper Series 1439, European Central Bank.
  4. Ghosh, Saibal, 2008. "Financial Inclusion and Financial Fragility: An Empirical Note," MPRA Paper 24252, University Library of Munich, Germany.
  5. Manuel Illueca & José Pastor & Emili Tortosa-Ausina, 2009. "The effects of geographic expansion on the productivity of Spanish savings banks," Journal of Productivity Analysis, Springer, vol. 32(2), pages 119-143, October.
  6. Lorenzo Ciari & Riccardo De Bonis, 2011. "Entry decisions after deregulation: the role of incumbents' market power," Mo.Fi.R. Working Papers 50, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  7. Di Cesare, Antonio, 2009. "Securitization and Bank Stability," MPRA Paper 16831, University Library of Munich, Germany.
  8. Nabi, Mahmoud Sami & Ben Souissi, Souraya, 2011. "Could dishonest banks be disciplined ?," MPRA Paper 32010, University Library of Munich, Germany.

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