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A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending

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  • Rodrigo Canales

    ()
    (Yale University)

  • Ramana Nanda

    ()
    (Harvard Business School, Entrepreneurial Management Unit)

Abstract

We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks ? where branch managers have greater autonomy over lending decisions ? give larger loans to small firms and those with "soft information". However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This "darker side" to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.

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Bibliographic Info

Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 08-101.

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Length: 34 pages
Date of creation: Jun 2008
Date of revision: Aug 2011
Handle: RePEc:hbs:wpaper:08-101

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Keywords: banking; bank structure; soft information; small business lending;

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Citations

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Cited by:
  1. William R. Kerr & Ramana Nanda, 2009. "Financing Constraints and Entrepreneurship," Harvard Business School Working Papers 10-013, Harvard Business School.
  2. Feng, Guohua & Zhang, Xiaohui, 2014. "Returns to scale at large banks in the US: A random coefficient stochastic frontier approach," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 135-145.
  3. Silvia Angilella & Sebastiano Mazz\`u, 2013. "The Financing of Innovative SMEs: a multicriteria credit rating model," Papers 1308.0889, arXiv.org.
  4. Berger, Allen N. & Goulding, William & Rice, Tara, 2013. "Do Small Businesses Still Prefer Community Banks?," International Finance Discussion Papers 1096, Board of Governors of the Federal Reserve System (U.S.).
  5. Olena Senyuta, 2013. "Delegation and Performance," CERGE-EI Working Papers wp497, The Center for Economic Research and Graduate Education - Economic Institute, Prague.
  6. Jose M. Berrospide & Lamont K. Black & William R. Keeton, 2013. "The cross-market spillover of economic shocks through multi-market banks," Finance and Economics Discussion Series 2013-52, Board of Governors of the Federal Reserve System (U.S.).
  7. Holmberg, Ulf & Sjögren, Tomas & Hellström, Jörgen, 2012. "Comparing Centralized and Decentralized Banking: A Study of the Risk-Return Profiles of Banks," UmeÃ¥ Economic Studies 838, Umeå University, Department of Economics.
  8. Rosa, Frederico, 2013. "Capital-as-a-Service?," MPRA Paper 52220, University Library of Munich, Germany.
  9. Koetter, Michael, 2013. "Market structure and competition in German banking: Modules I and IV," Working Papers 06/2013, German Council of Economic Experts / Sachverständigenrat zur Begutachtung der gesamtwirtschaftlichen Entwicklung.

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