Industrial Organization of Financial Systems and Strategic Use of Relationship Banking

Posted: 18 Jan 2002

See all articles by Yishay Yafeh

Yishay Yafeh

Hebrew University of Jerusalem - Jerusalem School of Business Administration; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Oved Yosha

Tel Aviv University - The Eitan Berglas School of Economics (Deceased)

Abstract

Using standard Industrial Organization tools, we analyze the relation between competition in arm's length financial markets and the prevalence of close bank-firms ties. We show how the degree of competition between financial intermediaries affects the intensity of relationships between banks and client firms, and explore the idea that investment in bank-firm relationships can be used strategically by incumbent multi-product (universal) banks to limit competition in arm's length markets. The analysis implies that reforms designed to facilitate entry of new intermediaries may actually induce incumbent banks to increase investment in relationship banking, so that regulatory entry barriers are replaced by entry barriers created endogenously, namely, there is "path dependence" in the market structure of financial systems. This result suggests that increased (potential) competition in the financial services industry will not always destroy bank-firm relationships but, on the contrary, may actually strengthen them.

Keywords: relationship banking, competition in banking, universal banking, multi-product banking, entry deterrence

JEL Classification: G21, L1

Suggested Citation

Yafeh, Yishay and Yosha, Oved, Industrial Organization of Financial Systems and Strategic Use of Relationship Banking. European Finance Review, Vol. 5, No. 1-2. Available at SSRN: https://ssrn.com/abstract=292951

Yishay Yafeh (Contact Author)

Hebrew University of Jerusalem - Jerusalem School of Business Administration ( email )

Mount Scopus
Jerusalem 91905
Israel
+972 2 588 3081 (Phone)
+972 2 588 1341 (Fax)

HOME PAGE: http://bschool.huji.ac.il/facultye/yafeh/

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Oved Yosha

Tel Aviv University - The Eitan Berglas School of Economics (Deceased)

N/A

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