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Banking on Deposit Relationships: Implications for Hold-Up Problems in the Loan Market

Author

Listed:
  • Jin Cao

    (Norges Bank - Research Department; CESifo (Center for Economic Studies and Ifo Institute))

  • Emilia Garcia-Appendini

    (Norges Bank; University of St. Gallen - School of Finance; Swiss Finance Institute)

  • Cédric Huylebroek

    (KU Leuven - Faculty of Economics and Business)

Abstract

By lending to a firm, inside banks gain an informational advantage over outside banks, enabling them to hold up borrowers and extract informational rents. Using unique data on firm-bank deposit and lending relationships in Norway, we show that deposit relationships between firms and outside banks mitigate inside banks’ informational advantage, thereby attenuating hold-up. This result holds using quasi-random variation in deposit relationships induced by the deposit insurance threshold, and is driven by the information provided by firms’ deposit account activities to outside banks (not cross-selling). Overall, our paper offers the first evidence that deposit relationships impact lender competition.

Suggested Citation

  • Jin Cao & Emilia Garcia-Appendini & Cédric Huylebroek, 2024. "Banking on Deposit Relationships: Implications for Hold-Up Problems in the Loan Market," Swiss Finance Institute Research Paper Series 24-64, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2464
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    More about this item

    Keywords

    Deposit relationships; Hold-up problems; Lender competition; Lender switching; Information asymmetries;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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