Market structure, screening activity and bank lending behavior.

Papanikolaou, N.I., 2010. Market structure, screening activity and bank lending behavior. Working Paper. University of Luxembourg, Luxembourg School of Finance.

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Abstract

In this paper we construct a theoretical model of spatial banking competition that considers the differential information among banks and potential borrowers in order to investigate how market structure affects the lending behavior of banks and their incentives to invest in screening technology. Consistent with the prevailing view in the relevant literature, our results reveal that competition reduces lending cost, which, in turn, encourages the entry of new customers in the loan market. Also, that the transportation cost that potential borrowers have to pay in order to reach the bank of their interest is decreased with the degree of competitiveness. Importantly, we demonstrate that market structure exerts a considerable positive effect on banks' incentives to screen their loan applicants since banks are found to invest more in screening as competition in the market becomes higher. This is to say, banks resort to screening that serves as a buffer mechanism against bad credit which entails higher risk and which is more likely under competitive conditions. Overall, our findings provide support to a rather close link between the degree of competition, bank lending activity, and the investment of banks in screening technology.

Item Type:Monograph (Working Paper)
Additional Information:LSF Research Working Paper series 10-11
Uncontrolled Keywords:banking; spatial competition; screening; credit risk
Group:Faculty of Management
ID Code:29806
Deposited By: Unnamed user with email symplectic@symplectic
Deposited On:02 Oct 2017 14:40
Last Modified:02 Oct 2017 14:40

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