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Relationship Lending, Bank Competition and Financial Stability

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  • Juha-Pekka Niinimäki

    () (University of Turku, Department of Economics, Turku, Finland)

Abstract

This paper explores the effects of relationship lending on bank stability under perfect bank competition. Relationship banking generates profitable old lending relationships, which ease the stress to search and monitor new borrowers, and create great charter values for banks even under bank competition. These everlasting charter values mitigate risk-taking incentives improving financial stability. We find the maximum growth speed for banks so that they will avoid risk taking, and discover the optimal equity capital requirement: new banks and rapidly growing banks should have relatively more capital.

Suggested Citation

  • Juha-Pekka Niinimäki, 2014. "Relationship Lending, Bank Competition and Financial Stability," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 8(3), pages 102-124, December.
  • Handle: RePEc:fau:aucocz:au2014_102
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    References listed on IDEAS

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    Cited by:

    1. Juha-Pekka Niinimäki, 2015. "Asymmetric Information, Bank Lending and Implicit Contracts: Differences between Banks," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 9(2), pages 074-090, December.

    More about this item

    Keywords

    Relationship lending; bank competition; financial stability; charter value; bank capital requirements;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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