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

See all articles by Rodrigo Canales

Rodrigo Canales

Yale School of Management

Ramana Nanda

Harvard University - Entrepreneurial Management Unit

Date Written: August 24, 2011

Abstract

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

Suggested Citation

Canales, Rodrigo and Nanda, Ramana, A Darker Side to Decentralized Banks: Market Power and Credit Rationing in SME Lending (August 24, 2011). Harvard Business School Entrepreneurial Management Working Paper No. 08-101. Available at SSRN: https://ssrn.com/abstract=1623445 or http://dx.doi.org/10.2139/ssrn.1623445

Rodrigo Canales (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
(203) 432-6054 (Phone)
(203) 432-9994 (Fax)

Ramana Nanda

Harvard University - Entrepreneurial Management Unit ( email )

Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/rnanda

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