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A Theory of Banks' Industry Expertise, Market Power, and Credit Risk

Author

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  • Alex Stomper

    () (Institute for Advanced Studies and Vienna Graduate School of Finance, Stumpergasse 56, 1060 Vienna, Austria)

Abstract

The author analyzes banks' incentives to acquire expertise in judging the creditworthiness of borrowers in an industry with uncertain business conditions. The analysis shows that industry expertise enables banks to extract rents proportional to their exposure to industry-specific credit risk. This exposure is in turn determined by the number of banks aiming to focus on lending to an industry. In equilibrium, the industry receives funding from a limited number of banks with industry expertise, as well as from a competitive fringe of financiers without such expertise. The equilibrium yields testable predictions about the concentration of bank lending to an industry, and about the correlation between this concentration and the recovery rates, default rates, and interest rates of bank loans.

Suggested Citation

  • Alex Stomper, 2006. "A Theory of Banks' Industry Expertise, Market Power, and Credit Risk," Management Science, INFORMS, vol. 52(10), pages 1618-1633, October.
  • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:10:p:1618-1633
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    File URL: http://dx.doi.org/10.1287/mnsc.1060.0559
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Dickler, Robert A. & Schalast, Christoph, 2006. "Distressed debt in Germany: What's next? Possible innovative exit strategies," Frankfurt School - Working Paper Series 73, Frankfurt School of Finance and Management.
    2. Degryse, H.A. & Ongena, S., 2003. "The Impact of Competition on Bank Orientation and Specialization," Discussion Paper 2003-108, Tilburg University, Center for Economic Research.
    3. Adam Geršl & Petr Jakubik & Dorota Kowalczyk & Steven Ongena & José-Luis Peydró, 2015. "Monetary Conditions and Banks’ Behaviour in the Czech Republic," Open Economies Review, Springer, vol. 26(3), pages 407-445, July.
    4. Tabak, Benjamin M. & Fazio, Dimas M. & Cajueiro, Daniel O., 2011. "The effects of loan portfolio concentration on Brazilian banks' return and risk," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3065-3076, November.
    5. Steven Ongena & Yuejuan Yu, 2017. "Firm Industry Affiliation and Multiple Bank Relationships," Journal of Financial Services Research, Springer;Western Finance Association, vol. 51(1), pages 1-17, February.
    6. Yu, Y., 2014. "Essays on relationship banking," Other publications TiSEM f3d56b9e-e79e-46c4-bd42-4, Tilburg University, School of Economics and Management.
    7. Hans Degryse & Steven Ongena, 2004. "The Impact of Competition on Bank Orientation and Specialization (new titel: The impact of competition on bank orientation)," CESifo Working Paper Series 1119, CESifo Group Munich.
    8. Thiago Christiano Silva & Michel Alexandre da Silva & Benjamin Miranda Tabak, 2016. "Modeling Financial Networks: a feedback approach," Working Papers Series 438, Central Bank of Brazil, Research Department.
    9. Spagnolo, Giancarlo, 1998. "Debt as a (Credible) Collusive Device, or: "Everybody Happy but the Consumer"," SSE/EFI Working Paper Series in Economics and Finance 243, Stockholm School of Economics, revised 01 Aug 2004.
    10. Jiawei Chen, 2006. "Two-Sided Matching and Spread Determinants in the Loan Market," Working Papers 060702, University of California-Irvine, Department of Economics.

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