Competition and Strategic Focus in Lending Relationships

34 Pages Posted: 27 Jan 2001

See all articles by Robert B. H. Hauswald

Robert B. H. Hauswald

American University - Department of Finance and Real Estate

Robert Marquez

University of California, Davis

Date Written: October 2000

Abstract

While competition constrains the ability of banks to extract informational rents from lending relationships, their informational monopoly curtails competition through the threat of adverse selection. These opposing forces also shape banks' incentives to invest in relationship lending expertise. To analyze an intermediary's optimal strategic response to growing competition, we specify a model where the severity of asymmetric information between banks and borrowers increases with informational distance. As increased competition erodes informational rents intermediaries focus more resources on building lending relationships in their core markets. This retrenchment from peripheral loan segments permits banks to fend off the competitive threat to their captive market, even as they continue to offer transactional loans outside their core segment.

Keywords: Banking, competition, relationship lending, specialization, focus

JEL Classification: G21, L1, L14, D4

Suggested Citation

Hauswald, Robert B.H. and Marquez, Robert S., Competition and Strategic Focus in Lending Relationships (October 2000). Available at SSRN: https://ssrn.com/abstract=257649 or http://dx.doi.org/10.2139/ssrn.257649

Robert B.H. Hauswald (Contact Author)

American University - Department of Finance and Real Estate ( email )

Kogod School of Business
4400 Massachusetts Ave., N.W.
Washington, DC 20016-8044
United States
202-885-1996 (Phone)
202-885-1946 (Fax)

Robert S. Marquez

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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