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A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending

  • Rodrigo Canales

    ()

    (Yale University)

  • Ramana Nanda

    ()

    (Harvard Business School, Entrepreneurial Management Unit)

We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks ? where branch managers have greater autonomy over lending decisions ? give larger loans to small firms and those with "soft information". However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This "darker side" to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.

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Paper provided by Harvard Business School in its series Harvard Business School Working Papers with number 08-101.

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Length: 34 pages
Date of creation: Jun 2008
Date of revision: Aug 2011
Handle: RePEc:hbs:wpaper:08-101
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