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

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  • Rodrigo Canales

    () (Yale University)

  • Ramana Nanda

    () (Harvard Business School, Entrepreneurial Management Unit)

Abstract

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.

Suggested Citation

  • Rodrigo Canales & Ramana Nanda, 2008. "A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending," Harvard Business School Working Papers 08-101, Harvard Business School, revised Aug 2011.
  • Handle: RePEc:hbs:wpaper:08-101
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    More about this item

    Keywords

    banking; bank structure; soft information; small business lending;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L43 - Industrial Organization - - Antitrust Issues and Policies - - - Legal Monopolies and Regulation or Deregulation
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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