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Entry Decisions and Adverse Selection: An Empirical Analysis of Local Credit Markets

  • Giorgio Gobbi
  • Francesca Lotti

    ()

During the last decades there has been a widespread relaxation of legal entry barriers into the banking industry, with potential benefits for financial integration and competition. Obstacles to banks' geographical and business expansion have been removed and branching has been substantially liberalized. This paper analyzes the determinants of entry decisions into local credit markets using a unique data set before and after deregulation of the Italian banking industry. We estimate an entry model � la Poisson and find evidence that spreads between loan and deposit rates drive entry only for newly chartered banks, but does not affect the decision to open branches of banks operating in other markets. Branching by outside banks is instead positively correlated with business opportunities in the provision of financial services which do not require the acquisition of substantial proprietary information. Both these results are consistent with the hypothesis that in credit markets incumbents have an informational advantage over new entrants.

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File URL: http://hdl.handle.net/10.1023/B:FINA.0000040050.85362.a2
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Article provided by Springer in its journal Journal of Financial Services Research.

Volume (Year): 26 (2004)
Issue (Month): 3 (December)
Pages: 225-244

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Handle: RePEc:kap:jfsres:v:26:y:2004:i:3:p:225-244
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102934

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  1. Marcello Bofondi & Giorgio Gobbi, 2004. "Bad Loans and Entry into Local Credit Markets," Temi di discussione (Economic working papers) 509, Bank of Italy, Economic Research and International Relations Area.
  2. Boot, Arnoud W A & Thakor, Anjan V, 2001. "The Many Faces of Information Disclosure," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1021-57.
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  13. repec:dgr:kubcen:200216 is not listed on IDEAS
  14. Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
  15. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages F32-F53, February.
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  17. Besanko, David & Thakor, Anjan V., 1992. "Banking deregulation: Allocational consequences of relaxing entry barriers," Journal of Banking & Finance, Elsevier, vol. 16(5), pages 909-932, September.
  18. Bonaccorsi di Patti, Emilia & Gobbi, Giorgio, 2001. "The changing structure of local credit markets: Are small businesses special?," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2209-2237, December.
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