We show that collateral plays an important role in the design of debt contracts, the provision of credit, and the incentives of lenders to monitor borrowers. Using a unique data set from a large bank ...containing timely assessments of collateral values, we find that the bank responded to a legal reform that exogenously reduced collateral values by increasing interest rates, tightening credit limits, and reducing the intensity of its monitoring of borrowers and collateral, spurring borrower delinquency on outstanding claims. We thus explain why banks are senior lenders and quantify the value of claimant priority.
This paper studies loan conditions when firms switch banks. Recent theoretical work on bank-firm relationships motivates our matching models. The dynamic cycle of the loan rate that we uncover is as ...follows: a loan granted by a new (outside) bank carries a loan rate that is significantly lower than the rates on comparable new loans from the firm's current (inside) banks. The new bank initially decreases the loan rate further but eventually ratchets it up sharply. Other loan conditions follow a similar economically relevant pattern. This bank strategy is consistent with the existence of hold-up costs in bank-firm relationships.
To study the impact of macroprudential policy on credit supply cycles and real effects, we analyze dynamic provisioning. Introduced in Spain in 2000, revised four times, and tested in its ...countercyclicality during the crisis, it affected banks differentially. We find that dynamic provisioning smooths credit supply cycles and, in bad times, supports firm performance. A 1 percentage point increase in capital buffers extends credit to firms by 9 percentage points, increasing firm employment (6 percentage points) and survival (1 percentage point). Moreover, there are important compositional effects in credit supply related to risk and regulatory arbitrage by nonregulated and regulated but less affected banks.
We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more ...than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease with the distance between the firm and the lending bank and increase with the distance between the firm and competing banks. Transportation costs cause the spatial price discrimination we observe.
This paper provides the first empirical evidence that bank regulation is associated with cross-border spillover effects through the lending activities of large multinational banks. We analyze ...business lending by 155 banks to 9,613 firms in 1,976 different localities across 16 countries. We find that lower barriers to entry, tighter restrictions on bank activities, and to a lesser degree higher minimum capital requirements in domestic markets are associated with lower bank lending standards abroad. The effects are stronger when banks are less efficiently supervised at home, and are observed to exist independently from the impact of host-country regulation.
•We examine the effect of banking competition on SMEs’ credit constraints in China.•Lower banking market concentration alleviates financing constraints of SMEs.•The joint-stock banks have a larger ...effect than the city commercial banks.•The joint-stock banks have a larger effect than the state-owned banks.•The effect is through prices rather than the offering of relationship lending.
Banking competition may enhance or hinder the financing of small and medium-sized enterprises. Using a survey on the financing of such enterprises in China, combined with detailed bank branch information, we investigate how concentration in local banking market affects the availability of credit. We find that lower market concentration alleviates financing constraints. The widespread presence of joint-stock banks has a larger effect on alleviating these constraints, than the presence of city commercial banks, while the presence of state-owned banks has a smaller effect.
We study the risk-taking channel of monetary policy in Bolivia, a dollarized country where monetary changes are transmitted exogenously from the USA. We find that a lower policy rate spurs the ...granting of riskier loans, to borrowers with worse credit histories, lower ex-ante internal ratings, and weaker ex-post performance (acutely so when the rate subsequently increases). Effects are stronger for small firms borrowing from multiple banks. To uniquely identify risk-taking, we assess collateral coverage, expected returns, and risk premia of the newly granted riskier loans, finding that their returns and premia are actually lower, especially at banks suffering from agency problems.
While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of ...60,000 firm-year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and use of financial debt even though the effect is dampened for small firms. More strikingly, young firms benefit most from foreign bank presence, while businesses connected to domestic banks or to the government suffer. Overall, our findings suggest that foreign banks can help to mitigate connected-lending problems and to improve capital allocation.
The paper studies the international transmission of shocks from the banking to the real sector during the global financial crisis. For identification, it uses matched bank-firm-level data, covering ...mainly small and medium-sized firms in Eastern Europe and Turkey, and exploits the Lehman failure. The paper finds that internationally borrowing domestic and especially foreign owned banks contract their credit more during the crisis than locally funded domestic banks do. Firms dependent on credit and with a relationship with internationally borrowing domestic or foreign banks suffer more in their financing and real performance, especially when single-bank, small or with limited tangible assets. Moreover, firms in countries with lower financial development, more reliance on foreign funding and slower contract enforcement are more affected. Overall the results suggest the existence of spillovers to the real sector through an international banking channel but with heterogeneous effects across firms and countries.
How do banks react to increased competition? Recent banking theory significantly disagrees regarding the impact of competition on bank orientation—i.e., the choice of relationship-based versus ...transactional banking. We empirically investigate the impact of interbank competition on bank branch orientation. We employ a unique data set containing detailed information on bank–firm relationships. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending. Our results illustrate that competition and relationships are not necessarily inimical.
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