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Estimating firms’ bank-switching costs

Author

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  • Karolis Liaudinskas
  • Kristina GrigaitÄ—

Abstract

We explore Lithuanian credit register data and two bank closures to provide a novel estimate of firms’ bank-switching costs and a novel identification of the hold-up problem. We show that when a distressed bank’s closure forced firms to switch, these firms started borrowing at lower interest rates immediately and permanently. This suggests that firms were held up and overcharged exante, and reveals the lower bound of their ex-ante switching costs. Opaquer firms were overcharged more, which suggests that information asymmetries significantly contribute to switching costs. In line with banks’ reputational concerns, a healthy bank’s closure revealed no overcharging. To policy-makers, our results suggest potential benefits of distressed banks’ closures.

Suggested Citation

  • Karolis Liaudinskas & Kristina GrigaitÄ—, 2021. "Estimating firms’ bank-switching costs," Working Paper 2021/4, Norges Bank.
    • Handle: RePEc:bno:worpap:2021_4
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    File URL: https://hdl.handle.net/11250/2758398
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    References listed on IDEAS

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    More about this item

    Keywords

    switching costs; lending relationships; hold-up; asymmetric information; bank closures; financial distress;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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