Banking consolidation and small business lending

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Banking consolidation and small business lending

Author Info

El?d Takáts () (Department of Economics, Princeton University, Fisher Hall, Princeton, 08544-1021 NJ, USA.)

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Elod Takats

Abstract

The paper investigates small business lending as an information problem. It models the effects of information asymmetries within the bank combined with fixed wages. Two kinds of inefficiencies arise in equilibrium: the credit officer either sometimes shirks or he is occasionally fired. In both cases lending falls below the first-best level. The solution, when the bank accepts the information asymmetries, is called the centralized structure. Under decentralized structure the bank employs additional supervisors to mitigate the information asymmetries within its organization. Decentralized banks manage to finance more small firms, but incur higher costs than centralized ones. Small banks are interpreted as a bank with relatively few credit officers, whom can be monitored without information asymmetries. The specification allows for investigating the effects of banking consolidation and technological change on small business lending. The model suggests that not banking size, but organizational structure is decisive in small business lending.

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Publisher Info
Paper provided by European Central Bank in its series Working Paper Series with number 407.

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Length: 35 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:ecb:ecbwps:20040407

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-10-04 (All new papers)
NEP-BEC-2005-10-04 (Business Economics)
NEP-CFN-2005-10-04 (Corporate Finance)
NEP-ENT-2005-10-04 (Entrepreneurship)
NEP-FIN-2005-10-04 (Finance)

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Other versions:
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Other versions:
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Other versions:
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Other versions:
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Other versions:
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Other versions:
- Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organzizational Form? Evidence From the Lending Practices of Large and Small Banks," Harvard Institute of Economic Research Working Papers 1976, Harvard - Institute of Economic Research. [Downloadable!]
- Allen N. Berger & Nathan H. Miller & Mitchell A. Petersen & Raghuram G. Rajan & Jeremy C. Stein, 2002. "Does Function Follow Organizational Form? Evidence From the Lending Practices of Large and Small Banks," NBER Working Papers 8752, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
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Tetsuji Okazaki & Michiru Sawada & Ke Wang, 2005. "The Fall of "Organ Bank" Relationships During the Wave of Bank Failures and Consolidations: Experience in Pre-war Japan," CIRJE F-Series CIRJE-F-379, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]

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