The Impact of Competition on Bank Orientation
CentER Discussion Paper Series No. 2006-68
41 Pages Posted: 17 Sep 2006
Date Written: February 2006
How do banks react to increased competition? Recent banking theory offers conflicting predictions about the impact of competition on bank orientation - i.e., the choice of relationship based versus transactional banking. We empirically investigate the impact of interbank competition on bank branch orientation. We employ a unique data set containing detailed information on bank-firm relationships. We find that bank branches facing stiff local competition engage considerably more in relationship-based lending. Our results illustrate that competition and relationships are not necessarily inimical.
Keywords: bank orientation, bank industry specialization, competition, lending relationships
JEL Classification: G21, L11, L14
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