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The Number of Bank Relationships, Borrowing Costs and Bank Competition

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  • Diana Bonfim
  • Qinglei Dai
  • Francesco Franco

Abstract

This paper provides new evidence on the effect of bank competition on the cost of lending, in an environment of reduced information asymmetries between firms and banks. We construct a simple model linking the number of bank relationships, the cost of lending and bank competition. Banks are exposed to more competition if the firm has many ongoing bank relationships that improve her threat point when negotiating borrowing costs. Moreover, increased competition in the banking sector might mitigate (substitute) or amplify (complement) this effect. Using a unique data set from Portugal, we find that when a firm borrows from one additional bank, the interest rate on bank loans for this firm becomes 9 to 20 basis points lower on average. In addition, we find that when local bank competition is more intense firms can benefit more from simultaneously engaging in several banking relationships, hence providing evidence of complementarity between competition and the number of bank relationships. However, we do not observe these effects for the smallest and youngest firms.

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Bibliographic Info

Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200912.

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Date of creation: 2009
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Handle: RePEc:ptu:wpaper:w200912

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Cited by:
  1. Gajewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech, 2012. "Relacje firm z bankami w Polsce w świetle danych ze sprawozdawczości bankowej
    [Bank-firm relationships in Poland in the light of data from bank reporting]
    ," MPRA Paper 42544, University Library of Munich, Germany, revised 29 Oct 2012.
  2. Gammadigbé, Vigninou, 2013. "Nouvelles exigences en capital des banques de l'UEMOA, concentration bancaire et coût du crédit au Togo
    [New capital requirements of WEAMU banks, banking concentration and cost of crédit in Togo
    ," MPRA Paper 44633, University Library of Munich, Germany.

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