Banking competition and borrower screening: New insights

By taking a more comprehensive perspective than the existing literature does, we investigate how banks adjust borrower screening when banking competition increases. Using bank loan data on China’s A-share listed companies from 2003 to 2023, we find that increased banking competition prompts banks to adjust their screening. Specifically, banks substantially increase lending to high-risk, high-return enterprises and moderately increase lending to low-risk, low-return enterprises. In addition, this effect is more pronounced in regions with a lower proportion of small and medium-sized banks (SMBs) and in regions with greater levels of local government debt (LGD). Further tests show that, as banking competition increases, banks issue a greater proportion of short-term loans to high-risk, high-return enterprises to control risk, which exacerbates the mismatch between the investment and debt maturities of these enterprises. These findings provide important insights for regulators seeking to supervise banking competition and improve the maturity matching of enterprises’ investments and debts.