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Market Strucutre, Screening Activity and Bank Lending Behavior

Author

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  • Nikolaos Papanikolaou

    (Luxembourg School of Finance, University of Luxembourg)

Abstract

In this paper we construct a theoretical model of spatial banking competition that considers the differential information among banks and potential borrowers in order to investigate how market structure affects the lending behavior of banks and their incentives to invest in screening technology. Consistent with the prevailing view in the relevant literature, our results reveal that competition reduces lending cost, which, in turn, encourages the entry of new customers in the loan market. Also, that the transportation cost that potential borrowers have to pay in order to reach the bank of their interest is decreased with the degree of competitiveness. Importantly, we demonstrate that market structure exerts a considerable positive effect on banks’ incentives to screen their loan applicants since banks are found to invest more in screening as competition in the market becomes higher. This is to say, banks resort to screening that serves as a buffer mechanism against bad credit which entails higher risk and which is more likely under competitive conditions. Overall, our findings provide support to a rather close link between the degree of competition, bank lending activity, and the investment of banks in screening technology. "Keywords: banking; spatial competition; screening; credit risk" "Classification-JEL: G21; D41; D80"

Suggested Citation

  • Nikolaos Papanikolaou, 2010. "Market Strucutre, Screening Activity and Bank Lending Behavior," LSF Research Working Paper Series 10-11, Luxembourg School of Finance, University of Luxembourg.
  • Handle: RePEc:crf:wpaper:10-11
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    References listed on IDEAS

    as
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    6. Chiappori, Pierre-Andre & Perez-Castrillo, David & Verdier, Thierry, 1995. "Spatial competition in the banking system: Localization, cross subsidies and the regulation of deposit rates," European Economic Review, Elsevier, vol. 39(5), pages 889-918, May.
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    Cited by:

    1. Bose, Arup & Pal, Debashis & Sappington, David E.M., 2012. "Extreme screening policies," European Economic Review, Elsevier, vol. 56(8), pages 1607-1620.

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    More about this item

    Keywords

    banking; spatial competition; screening; credit risk"; "; classification-jel: g21; d41; d80";
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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