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Endogenous Relationship Banking to Alleviate Excessive Screening in Transaction Banking

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  • Ogura, Yoshiaki

Abstract

This paper analyzes how learning a borrower's creditworthiness, from past lending decision by a rival bank that is publicly observable through private or public credit reporting systems, affects the performance of subsequent lending competitions. Our analysis of twicerepeated lending competitions demonstrates that such ex post information sharing causes inefficient and excessive screening of new borrowers when banks undertake transaction banking since each bank expects future disadvantages to result from the information revelation. Relationship banking arises endogenously as a defense against such anticipated disadvantage, and improves the economic efficiency by alleviating the excessive screening.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13457/1/DP487.pdf
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Bibliographic Info

Paper provided by Institute of Economic Research, Hitotsubashi University in its series Discussion Paper Series with number a487.

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Length: 43 p.
Date of creation: Dec 2006
Date of revision:
Handle: RePEc:hit:hituec:a487

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Related research

Keywords: relationship banking; informational externality; interbank competition; commonvalue; repeated auction;

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  1. Engelbrecht-Wiggans, Richard & Milgrom, Paul R. & Weber, Robert J., 1983. "Competitive bidding and proprietary information," Journal of Mathematical Economics, Elsevier, vol. 11(2), pages 161-169, April.
  2. von Thadden, Ernst-Ludwig, 1995. "Long-Term Contracts, Short-Term Investment and Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 557-75, October.
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Cited by:
  1. Ongena, Steven & Şendeniz-Yüncü, İlkay, 2011. "Which firms engage small, foreign, or state banks? And who goes Islamic? Evidence from Turkey," Journal of Banking & Finance, Elsevier, vol. 35(12), pages 3213-3224.

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