Informational Barriers to Entry into Credit Markets

Posted: 1 Sep 2008

Abstract

Economic theory suggests that asymmetric information between incumbents and entrants can generate barriers to entry into credit markets. Incumbents have superior information about their own customers and the overall economic conditions of the local credit market. This implies that entrants are likely to experience higher loan default rates than the incumbents. We test these theoretical predictions using a unique database of 7,275 observations on 729 individual banks' lending in 95 Italian local markets. We find that informational asymmetries play a significant role in explaining entrants' loan default rates. The default rate is significantly higher for those banks that entered local markets without opening a branch, suggesting that having a branch on site may help to reduce the informational disadvantage. We also uncover a positive correlation between banks' loan default rates in individual local markets and the number of banks lending in that market. We argue that these informational barriers can help to explain why entry into many local credit markets by domestic and foreign banks was slow, even after substantial deregulation.

Suggested Citation

Bofondi, Marcello and Gobbi, Giorgio, Informational Barriers to Entry into Credit Markets. Review of Finance, Vol. 10, Issue 1, pp. 39-67, 2006, Available at SSRN: https://ssrn.com/abstract=1260589 or http://dx.doi.org/10.1007/s10679-006-6978-2

Marcello Bofondi (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

Giorgio Gobbi

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

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