Does Bank Competition Reduce Cost of Credit? Cross-Country Evidence from Europe

32 Pages Posted: 11 Apr 2016  

Zuzana Fungáčová

Bank of Finland

Anastasiya Shamshur

Norwich Business School, University of East Anglia

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie)

Date Written: 2016

Abstract

Despite the extensive debate on the effects of bank competition, only a handful of single-country studies deal with the impact of bank competition on the cost of credit. We contribute to the literature by investigating the impact of bank competition on the cost of credit in a cross-country setting. Using a panel of firms from 20 European countries covering the period 2001–2011, we consider a broad set of measures of bank competition, including two structural measures (Herfindahl-Hirschman index and CR5), and two non-structural indicators (Lerner index and H-statistic). We find that bank competition increases the cost of credit and observe that the positive influence of bank competition is stronger for smaller companies. Our findings accord with the information hypothesis, whereby a lack of competition incentivizes banks to invest in soft information and conversely increased competition raises the cost of credit. This positive impact of bank competition is however influenced by the institutional and economic framework, as well as by the crisis.

Keywords: G21, L11, bank competition, bank concentration, cost of credit

Suggested Citation

Fungáčová, Zuzana and Shamshur, Anastasiya and Weill, Laurent, Does Bank Competition Reduce Cost of Credit? Cross-Country Evidence from Europe (2016). BOFIT Discussion Paper No. 6/2016. Available at SSRN: https://ssrn.com/abstract=2760841

Zuzana Fungáčová (Contact Author)

Bank of Finland

P.O. Box 160
Helsinki 00101
Finland

Anastasiya Shamshur

Norwich Business School, University of East Anglia ( email )

Norwich Research Park
Norwich, NR4 7TJ
United Kingdom

Laurent Weill

University of Strasbourg - LaRGE Research Center (Laboratoire de Recherche en Gestion et Economie) ( email )

61 Avenue de la Forêt Noire
F-67085 Strasbourg Cedex
France

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