Whether or not banks are engaged in ex ante monitoring of customers may have important consequences for the whole economy. We approach this question via a model in which banks can invest in either information acquisition or market power (product differentiation). The two alternatives generate different predictions, which are tested using panel data on Finnish local banks. We find evidence that banks’ investments in branch networks and human capital (personnel) contribute to information acquisition but not to market power. We also find that managing customers’ money transactions enhances banks ability to control their lending risks.
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Find related papers by JEL classification: D21 - Microeconomics - - Production and Organizations - - - Firm Behavior G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
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