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

Listed author(s):
  • Alex Stomper

    ()

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

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.

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File URL: http://dx.doi.org/10.1287/mnsc.1060.0559
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Article provided by INFORMS in its journal Management Science.

Volume (Year): 52 (2006)
Issue (Month): 10 (October)
Pages: 1618-1633

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Handle: RePEc:inm:ormnsc:v:52:y:2006:i:10:p:1618-1633
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  11. Richard Tilly, 1998. "Universal Banking in Historical Perspective," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 154(1), pages 1-7, March.
  12. Winton, Andrew, 1997. "Competition among Financial Intermediaries When Diversification Matters," Journal of Financial Intermediation, Elsevier, vol. 6(4), pages 307-346, October.
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  14. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2002. "Should banks be diversified? evidence from individual bank portfolios," Proceedings 836, Federal Reserve Bank of Chicago.
  15. von Thadden, Ernst-Ludwig, 2004. "Asymmetric information, bank lending and implicit contracts: the winner's curse," Finance Research Letters, Elsevier, vol. 1(1), pages 11-23, March.
  16. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
  17. Hellwig, Martin, 1998. "Allowing for risk choice in Diamond's "Financial intermediation as delegated monitoring"," Papers 98-04, Sonderforschungsbreich 504.
  18. Cerasi, Vittoria & Daltung, Sonja, 2000. "The optimal size of a bank: Costs and benefits of diversification," European Economic Review, Elsevier, vol. 44(9), pages 1701-1726, October.
  19. Sandra E. Black & Philip E. Strahan, 2002. "Entrepreneurship and Bank Credit Availability," Journal of Finance, American Finance Association, vol. 57(6), pages 2807-2833, December.
  20. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
  21. Nicola Cetorelli, 2001. "Does bank concentration lead to concentration in industrial sectors?," Working Paper Series WP-01-01, Federal Reserve Bank of Chicago.
  22. Bhattacharya Sudipto & Chiesa Gabriella, 1995. "Proprietary Information, Financial Intermediation, and Research Incentives," Journal of Financial Intermediation, Elsevier, vol. 4(4), pages 328-357, October.
  23. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
  24. Christine A. Parlour & Uday Rajan, 2001. "Competition in Loan Contracts," American Economic Review, American Economic Association, vol. 91(5), pages 1311-1328, December.
  25. Andrew Winton, 1999. "Don’t Put All Your Eggs in One Basket? Diversification and Specialization in Lending," Center for Financial Institutions Working Papers 00-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
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  28. Paola Sapienza, 2002. "The Effects of Banking Mergers on Loan Contracts," Journal of Finance, American Finance Association, vol. 57(1), pages 329-367, 02.
  29. Vojislav Maksimovic & Alex Stomper & Josef Zechner, 1999. "Capital Structure, Information Acquisition and Investment Decisions in an Industry Framework," Review of Finance, European Finance Association, vol. 2(3), pages 251-271.
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