Interbank competition and information production: Evidence from the interest rate difference

Research output: Contribution to journalArticle

12 Citations (Scopus)

Abstract

In this paper, using firm-level cross-sectional data in the US, we report that interest rates on loans extended by inside banks are significantly lower than those on loans extended by outside banks for younger firms in concentrated loan markets, while such loan rate differences are not clearly observed in competitive loan markets. The analytical model presented in this paper predicts that an inside bank is more likely to quote rates lower than those of outside banks to capture a customer in order to gain time to establish exclusive access to the customer's private information, counting on the consequent future rent from informational advantages over rival banks, if the inside bank intends to acquire private information about the borrower's creditworthiness. In light of this prediction, we conclude that the above empirical finding is consistent with the hypothesis that increased competition discourages banks from collecting borrower-specific private information.

Original languageEnglish
Pages (from-to)279-304
Number of pages26
JournalJournal of Financial Intermediation
Volume19
Issue number2
DOIs
Publication statusPublished - 2010 Apr 1
Externally publishedYes

Keywords

  • Credit market structure
  • G21
  • Information acquisition
  • L11
  • L14
  • Relationship banking

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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