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Foreigners vs. Natives: Bank Lending Technologies and Loan Pricing

Management Science, Forthcoming

55 Pages Posted: 6 Jul 2012 Last revised: 30 Oct 2016

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Vasso Ioannidou

Lancaster University - Management School; Centre for Economic Policy Research (CEPR)

Larissa Schäfer

Frankfurt School of Finance & Management

Date Written: September 2, 2016

Abstract

Can distance-related information asymmetries in credit markets be overcome with contract design and credit scoring models? To answer this question, we explore differences in foreign and domestic banks’ credit contract terms and pricing models. Using a sample of firms that borrow from both domestic and foreign banks in the same month, we show that foreign banks are more likely to demand collateral and grant shorter maturity loans than domestic banks. Foreign banks also base their pricing on internal credit ratings and collateral pledges, while domestic banks price according to the length, depth and breadth of their relationship with a firm. These findings confirm that foreign banks can overcome informational disadvantages using contract design and credit scoring models. However, we also show that there are limitations, with foreign banks facing higher default rates and lower returns on lending if not using collateral and short maturity as disciplining tools.

Keywords: Bank Financing, Foreign Ownership, Lending Technologies, Loan Pricing

JEL Classification: G21, G30

Suggested Citation

Beck, Thorsten and Ioannidou, Vasso and Schäfer, Larissa, Foreigners vs. Natives: Bank Lending Technologies and Loan Pricing (September 2, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2101037 or http://dx.doi.org/10.2139/ssrn.2101037

Thorsten Beck (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

Vasso Ioannidou

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Larissa Schäfer

Frankfurt School of Finance & Management ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

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