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Can Relationship Banking Survive Competition?

Author

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  • Arnoud W. A. Boot
  • Anjan V. Thakor

Abstract

How will banks evolve as competition increases from other banks and from the capital market? Will banks become more like capital market underwriters and offer passive transaction loans or return to their roots as relationship lending experts? These are the questions we address. Our key result is that as interbank competition increases, banks make more relationship loans, but each has lower added value for borrowers. Capital market competition reduces relationship lending (and bank lending shrinks), but each relationship loan has greater added value for borrowers. In both cases, welfare increases for some borrowers but not necessarily for all.

Suggested Citation

  • Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    • Handle: RePEc:bla:jfinan:v:55:y:2000:i:2:p:679-713
    DOI: 10.1111/0022-1082.00223
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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