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Bank Competition - When is it Good?

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  • Hainz, Christa

Abstract

The effects of bank competition and institutions on credit markets are usually studied separately although both factors are interdependent. We study the effect of bank competition on the choice of contracts (screening versus collateralized credit contract) and explicitly capture the impact of the institutional environment. Most importantly, we show that the effects of bank competition on collateralization, access to finance, and social welfare depend on the institutional environment. We predict that firms' access to credit increases in bank competition if institutions are weak but bank competition does not matter if they are well-developed.

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Bibliographic Info

Paper provided by Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems with number 244.

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Date of creation: Jul 2008
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Handle: RePEc:trf:wpaper:244

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Keywords: Bank competition; collateralization; screening; incentives;

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  1. Inderst, Roman & Mueller, Holger M., 2007. "A lender-based theory of collateral," Journal of Financial Economics, Elsevier, Elsevier, vol. 84(3), pages 826-859, June.
  2. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 850-55, September.
  3. Manove, M. & Padilla, A.J., 1997. "Banking (Conservatively) with Optimists," Papers, Centro de Estudios Monetarios Y Financieros- 9718, Centro de Estudios Monetarios Y Financieros-.
  4. Janet Mitchell & Patrick Van Roy, 2007. "Failure prediction models : performance, disagreements, and internal rating systems," Working Paper Research, National Bank of Belgium 123, National Bank of Belgium.
  5. Schnitzer, Monika, 1999. "On the role of bank competition for corporate finance and corporate control in transition economies," Munich Reprints in Economics, University of Munich, Department of Economics 19899, University of Munich, Department of Economics.
  6. Alexis Direr, 2008. "Multiple Equilibria in Markets with Screening," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(4), pages 791-798, 06.
  7. Giovanni Dell'Ariccia & Ezra Friedman & Robert Marquez, 1999. "Adverse Selection as a Barrier to Entry in the Banking Industry," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 515-534, Autumn.
  8. Nicola Cetorelli, 2001. "Competition among banks: good or bad?," Economic Perspectives, Federal Reserve Bank of Chicago, Federal Reserve Bank of Chicago, issue Q II, pages 38-48.
  9. Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2003. "Internal Ratings Systems, Implied Credit Risk and the Consistency of Banks’ Risk Classification Policies," Working Paper Series 155, Sveriges Riksbank (Central Bank of Sweden).
  10. Rajdeep Sengupta, 2006. "Foreign entry and bank competition," Working Papers, Federal Reserve Bank of St. Louis 2006-043, Federal Reserve Bank of St. Louis.
  11. Hainz, Christa, 2003. "Bank competition and credit markets in transition economies," Journal of Comparative Economics, Elsevier, vol. 31(2), pages 223-245, June.
  12. Sharpe, Steven A, 1990. " Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, American Finance Association, vol. 45(4), pages 1069-87, September.
  13. Theo Eicher & Andreas Leukert, 2009. "Institutions and Economic Performance: Endogeneity and Parameter Heterogeneity," Working Papers, University of Washington, Department of Economics UWEC-2007-16-P, University of Washington, Department of Economics.
  14. Inderst, Roman & Mueller, Holger M., 2006. "A lender-based theory of collateral," IMFS Working Paper Series 6, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
  15. Broecker, Thorsten, 1990. "Credit-Worthiness Tests and Interbank Competition," Econometrica, Econometric Society, Econometric Society, vol. 58(2), pages 429-52, March.
  16. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, Elsevier, vol. 31(4), pages 887-899, June.
  17. Beck, T.H.L. & Demirgüç-Kunt, A. & Maksimovic, V., 2004. "Bank competition and access to finance," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125507, Tilburg University.
  18. Giovanni Dell'Ariccia & Robert Marquez, 2006. "Lending Booms and Lending Standards," Journal of Finance, American Finance Association, American Finance Association, vol. 61(5), pages 2511-2546, October.
  19. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
  20. Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
  21. Mitchell Berlin & Alexander Butler, 2002. "Collateral and competition," Working Papers 02-22, Federal Reserve Bank of Philadelphia.
  22. Booth, James R. & Booth, Lena Chua, 2006. "Loan Collateral Decisions and Corporate Borrowing Costs," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(1), pages 67-90, February.
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