Bank Cross-Selling And The Production Of Soft Information

We model the effect of cross-selling on the quality of banks’ loans and interest rates under alternative lending technologies when banks produce both hard and soft information. The main theoretical findings are: i) when banks adopt transaction lending technologies, where loan officers have only the task of screening loan applicants, cross-selling lowers banks incentives of producing soft information and loans’ quality, ii) when banks adopt relationship lending technologies, where loan officers have the task of both screening and cross-selling services, cross-selling may improve banks’ incentives of producing soft information and loans quality, iii) under relatively competitive market conditions, cross-selling reduces lending interest rates for both transaction- and relationship-lending banks. The econometric analysis, carried on a sample of European banks over the period 2001-2006, support these findings. The results suggest regulators should address cross-selling strategies to control for bank risk in different ways depending on the lending technology adopted by banks.