IDEAS home Printed from https://ideas.repec.org/p/crf/wpaper/10-11.html
   My bibliography  Save this paper

Market Strucutre, Screening Activity and Bank Lending Behavior

Author

Listed:
  • 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.

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
    as

    Download full text from publisher

    File URL: http://www.lsf.lu/eng/content/download/2157/10774/file/10-11.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    2. repec:zbw:bofrdp:2008_027 is not listed on IDEAS
    3. Gianni De Nicolo & Elena Loukoianova, 2007. "Bank ownership, market structure, and risk," Proceedings 1058, Federal Reserve Bank of Chicago.
    4. 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.
    5. Jan Bouckaert & Hans Degryse, 2006. "Entry and Strategic Information Display in Credit Markets," Economic Journal, Royal Economic Society, vol. 116(513), pages 702-720, July.
    6. Steven C. Salop, 1979. "Monopolistic Competition with Outside Goods," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 141-156, Spring.
    7. Viral V. Acharya & Iftekhar Hasan & Anthony Saunders, 2006. "Should Banks Be Diversified? Evidence from Individual Bank Loan Portfolios," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1355-1412, May.
    8. Christa Hainz & Laurent Weill & Christophe Godlewski, 2013. "Bank Competition and Collateral: Theory and Evidence," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(2), pages 131-148, October.
    9. Nicola Cetorelli & Pietro F. Peretto, 2000. "Oligopoly banking and capital accumulation," Working Paper Series WP-00-12, Federal Reserve Bank of Chicago.
    10. Mitchell A. Petersen & Raghuram G. Rajan, 2002. "Does Distance Still Matter? The Information Revolution in Small Business Lending," Journal of Finance, American Finance Association, vol. 57(6), pages 2533-2570, December.
    11. Robert Hauswald & Robert Marquez, 2006. "Competition and Strategic Information Acquisition in Credit Markets," The Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 967-1000.
    12. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    13. Hyytinen, Ari, 2003. "Information production and lending market competition," Journal of Economics and Business, Elsevier, vol. 55(3), pages 233-253.
    14. Monika Schnitzer, 1999. "Enterprise restructuring and bank competition in transition economies," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 133-155, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guo, Wen-Chung & Tseng, Ping-Lun, 2023. "COVID-19, bank risk, and capital regulation: The aggregate shock and social distancing," The Quarterly Review of Economics and Finance, Elsevier, vol. 92(C), pages 155-173.
    2. Lehner, Maria & Schnitzer, Monika, 2008. "Entry of foreign banks and their impact on host countries," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 430-452, September.
    3. Shusen Qi & Ralph De Haas & Steven Ongena & Stefan Straetmans & Tamas Vadasz, 2017. "Move a Little Closer? Information Sharing and the Spatial Clustering of Bank Branches," Swiss Finance Institute Research Paper Series 17-74, Swiss Finance Institute, revised Jun 2023.
    4. Degryse, Hans & Ongena, Steven, 2007. "The impact of competition on bank orientation," Journal of Financial Intermediation, Elsevier, vol. 16(3), pages 399-424, July.
    5. Degryse, H.A. & Cerqueiro, G.M. & Ongena, S., 2007. "Distance, Bank Organizational Structure and Credit," Other publications TiSEM 34c2f607-3395-4fd9-9c52-4, Tilburg University, School of Economics and Management.
    6. Drexler, Alejandro & Guettler, Andre & Taskin, Ahmet Ali, 2023. "Competition between arm’s length and relational lenders: Who wins the contest?," Journal of International Money and Finance, Elsevier, vol. 137(C).
    7. Hyytinen, Ari, 2003. "Information production and lending market competition," Journal of Economics and Business, Elsevier, vol. 55(3), pages 233-253.
    8. Hans Degryse & Steven Ongena, 2004. "The Impact of Competition on Bank Orientation and Specialization (new titel: The impact of competition on bank orientation)," CESifo Working Paper Series 1119, CESifo.
    9. Bellucci, Andrea & Borisov, Alexander & Zazzaro, Alberto, 2013. "Do banks price discriminate spatially? Evidence from small business lending in local credit markets," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4183-4197.
    10. Cristina Bernini & Paola Brighi, 2011. "Relationship Lending, Distance and Efficiency in a Heterogeneous Banking System," Working Paper series 41_11, Rimini Centre for Economic Analysis.
    11. Goedde-Menke, Michael & Ingermann, Peter-Hendrik, 2024. "Loan officer specialization and credit defaults," Journal of Banking & Finance, Elsevier, vol. 161(C).
    12. Mariarosaria Agostino & Lucia Errico & Sandro Rondinella & Francesco Trivieri, 2024. "Leverage and SMEs financial stability: the role of banking competition," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 48(2), pages 345-376, June.
    13. Javier Andrés & Oscar Arce, 2012. "Banking Competition, Housing Prices and Macroeconomic Stability," Economic Journal, Royal Economic Society, vol. 122(565), pages 1346-1372, December.
    14. Ping-Lun Tseng & Wen-Chung Guo, 2022. "Fintech, Credit Market Competition, and Bank Asset Quality," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(3), pages 285-318, June.
    15. Djedidi-Kooli, Salima, 2009. "L’accès au financement des PME en France : quel rôle joué par la structure du système bancaire ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8354 edited by Etner, François.
    16. Luísa Farinha & Sotirios Kokas, 2022. "Real effects of imperfect bank-firm matching," Working Papers w202210, Banco de Portugal, Economics and Research Department.
    17. Jiménez, Gabriel & Salas, Vicente & Saurina, Jesús, 2009. "Organizational distance and use of collateral for business loans," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 234-243, February.
    18. Alfredo Martín Oliver & Sonia Ruano Pardo & Vicente Salas Fumás, 2014. "Productivity and welfare: an application to the Spanish banking industry," Working Papers 1426, Banco de España.
    19. Knyazeva, Anzhela & Knyazeva, Diana, 2012. "Does being your bank’s neighbor matter?," Journal of Banking & Finance, Elsevier, vol. 36(4), pages 1194-1209.
    20. Kislat, Carmen & Menkhoff, Lukas & Neuberger, Doris, 2013. "The use of collateral in formal and informal lending," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79765, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    banking; spatial competition; screening; credit risk;
    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:crf:wpaper:10-11. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Martine Zenner (email available below). General contact details of provider: https://edirc.repec.org/data/sfsculu.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.