The Impact of Organizational Structure and Lending Technology on Banking Competition

EFA 2006 Zurich Meetings

CentER Discussion Paper Series No. 2006-67

TILEC Discussion Paper No. 2007-019

54 Pages Posted: 22 Feb 2006

See all articles by Hans Degryse

Hans Degryse

KU Leuven, Department Accounting, Finance and Insurance; Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 10, 2006

Abstract

Recent theoretical models argue that a bank's organizational structure reflects its lending technology. A hierarchically organized bank will employ mainly hard information, whereas a decentralized bank will rely more on soft information. We investigate theoretically and empirically how bank organization shapes banking competition. Our theoretical model illustrates how a lending bank's geographical reach and loan pricing strategy is determined not only by its own organizational structure but also by organizational choices made by its rivals. We take our model to the data by estimating the impact of the lending and rival banks' organization on the geographical reach and loan pricing of a singular, large bank in Belgium. We employ detailed contract information from more than 15,000 bank loans granted to small firms, comprising the entire loan portfolio of this large bank, and information on the organizational structure of all rival banks located in the vicinity of the borrower. We find that the organizational structures of both the rival banks and the lending bank matter for branch reach and loan pricing. The geographical footprint of the lending bank is smaller when rival banks are large and hierarchically organized. Such rival banks may rely more on hard information. Geographical reach increases when rival banks have inferior communication technology, have a wider span of organization, and are further removed from a decision unit with lending authority. Rival banks' size and the number of layers to a decision unit also soften spatial pricing. We conclude that the organizational structure and technology of rival banks in the vicinity influence local banking competition.

Keywords: banking sector, bank size, competition, mode of organization, hierarchies, authority, technology

JEL Classification: G21, L11, L14

Suggested Citation

Degryse, Hans and Laeven, Luc A. and Ongena, Steven R. G., The Impact of Organizational Structure and Lending Technology on Banking Competition (February 10, 2006). EFA 2006 Zurich Meetings; CentER Discussion Paper Series No. 2006-67; TILEC Discussion Paper No. 2007-019 . Available at SSRN: https://ssrn.com/abstract=886264 or http://dx.doi.org/10.2139/ssrn.886264

Hans Degryse (Contact Author)

KU Leuven, Department Accounting, Finance and Insurance ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Sch├Ânberggasse 1
Z├╝rich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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