Informational switching costs, bank competition, and the cost of finance

This paper studies the links between competition in the lending market and spreads of bank loans in Brazil. Empirical evidence from private banks shows a positive relationship between market power, measured by the Lerner index, and the cost of finance, measured by loan spreads over the treasury curve. Moreover, information acquired through relationship lending is used differently by private and state-owned banks. On the one hand, private banks engage in a strategy of first competing fiercely for clients by offering a lower loan interest rate and later increasing rates as the relationship with the firm evolves, consistent with the holdup problem. On the other hand, state-owned banks reduce the spreads as they deepen their relationship with the firm, consistent with sharing of the informational benefits from their relationship.