'Time for a Change': Loan Conditions and Bank Behavior when Firms Switch Banks

Abstract:     
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 sharply ratchets it up. 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.

Number of Pages in PDF File: 81

Keywords: competition, banking sector, market structure

JEL Classification: G21, L11, L14

working papers series