A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending
34 Pages Posted: 13 Jun 2010 Last revised: 25 Aug 2011
Date Written: August 24, 2011
We use loan-level data to study how the organizational structure of banks impacts small business lending. We find that decentralized banks ― where branch managers have greater autonomy over lending decisions ― give larger loans to small firms and those with “soft information”. However, decentralized banks are also more responsive to their own competitive environment. They are more likely to expand credit when faced with competition but also cherry pick customers and restrict credit when they have market power. This “darker side” to decentralized banks in concentrated markets highlights that the level of local banking competition is key to determining which organizational structure provides better lending terms for small businesses.
Keywords: banking, bank structure, soft information, small business lending
JEL Classification: E44, G21, L26, L43, M13
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