The Structure of Bank Relationships, Endogenous Monitoring and Loan Rates

40 Pages Posted: 3 Jan 2001  

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Date Written: October 16, 2000

Abstract

This paper investigates, in a simple model of overlapping moral hazard problems between banks and firms, how the number of bank relationships affect banks' incentives to monitor their borrowers and how, in turn, these decisions affect loan rates and firms' choice between single and multiple relationships. The analysis shows that multiple lenders monitor less than a single lender. This is because they face duplication of effort and sharing of benefits in monitoring. However, as a consequence of diseconomies of scale in monitoring, multiple lenders do not necessarily require a higher loan rate. The firm's choice between single and multiple relationships is not univocal, depending on the relative severity of bank moral hazard as compared to firm moral hazard.

Keywords: Financial intermediaries, lending relationships, monitoring, loan rates

JEL Classification: C72, D82, G21, G32

Suggested Citation

Carletti, Elena, The Structure of Bank Relationships, Endogenous Monitoring and Loan Rates (October 16, 2000). EFMA 2001 Lugano Meetings. Available at SSRN: https://ssrn.com/abstract=249006 or http://dx.doi.org/10.2139/ssrn.249006

Elena Carletti (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

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